Big FII comeback: 3 key factors to watch amid Rs 19,000 crore buying binge

The markets are showing signs of stabilising after the sharp cuts recently. What’s particularly heartening is the back to back FII buying seen in the last 10 days. Foreign institutional investors have bought a little over Rs 19,000 crore in March so far. This after consecutive 5 months of FII selling is no doubt helping lift investor sentiment.

However, it is important to understand whether the current buying is a definitive comeback signal or mere flash in the pan. According to Akshay Chinchalkar, Head of Research, Axis Securities, “FIIs have infused Rs 19,831 crore in Indian markets so far, in March. Whether it is the start of something bigger will depend on a few things, such as:
1) A drop in rupee volatility
2) Falling treasury yields in the US and lower g-sec yields in India, on expectations of further rate cuts
3) Measured tariffs from the trump administration going forward
4) Valuation attractiveness of India relative to the EM pack
5) An overall risk-on environment for global equities.”

FII action in last 6 months

Are FIIs back? 3 key factors to watch

Here is a look at the 3 key factors to watch as investors calibrate the big FII strategy –

Rupee at multi-week highs

The rupee is currently trading at its highest levels since January this year. Interestingly the currency had declined nearly 2% in the last 1.5 months on the back of a strengthening dollar. However, RBI liquidity boost helped stabilise the currency’s fall to some extent.

Shrikant Chouhan, Head Equity Research, Kotak Securities pointed out that, “FIIs try to anticipate several factors while investing in any country. Especially for an emerging country like India they compare the trend of the currency and earnings of the corporates with their own country. These two factors display the policy maker’s intention and strength of the corporates. The valuations of companies have softened in the last 5 months and the trend of the currency should stabilize after April 2 when there is clarity on the tariffs from the US. Stability on these two factors can help FIIs turn positive on Indian markets.”

Probability of April rate cut rising

The recent easing in inflation along with the strength seen in the rupee is being interpreted as a key green flag that could bring in further rate cuts in April when the RBI MPC meets to decide on rates between April 7-9. According to market observers this could bode well not just for the economy but also give a definitive edge to India in the overall EM basket.

Venkatesh Balasubramanian, MD & Co-Head of Research at JM Financial Institutional Securities explained that after a 10% correction from the recent peak, “the Indian market valuations are not too far off from the historical mean of 17.2x. Post the slowdown seen in the past 2 quarters, we expect a rebound starting Q4FY25 and FY26. Interestingly, the rupee depreciation has also reversed. The Brent Crude has come significantly from highs of $90/bbl and the rate cut cycle has already begun in India. We are expecting another round of cut in April 2025, which bodes well for the Indian economy. Against this backdrop, it is possible that the net buying seen so far from FIIs in March, perhaps already signals the return of FIIs to India.”

The big earnings turnaround

The Q4 earnings season kick starts in a matter of weeks now. After the subdued Q3 performance, there are expectations that India Inc may see some signs of revival in the following few quarters before a complete turnaround by middle of 2025. This can augur well in terms of the FII bias shifting towards India. Siddhartha Khemka, Head – Research, Wealth Management, Motilal Oswal Financial Services highlighted that the Indian markets rebounded strongly in March with the Nifty 50 and Sensex surging around 7% so far, “This upswing has turned both indices positive for CY2025. This is largely driven by foreign investors returning to the market and buying. Further, positive data on cooling inflation (CPI inflation eased to seven-month low of 3.61% in February, down from 4.31% in January) and improved GDP growth (6.2% in Q3FY25, up from 5.6% in the previous quarter) has also boosted market sentiment. However, sustaining this rally depends on various global and domestic factors, including clarity on US reciprocal tariffs, upcoming corporate earnings, and foreign investor flows. Eventually, stable economic conditions, healthy earnings growth, and improved valuations will be crucial for sustaining foreign investor interest.

All in all, market observers as well as FIIs are watching out for a combination of local and global signals before the tide turns and they start making significant allocations in Indian markets again. The market regulator SEBI too has eased norms for foreign portfolio investors (FPIs), merchant banks and market infrastructure institutions (MIIs).