Is the FII (Foreign Institutional Investors) trend changing? For the first time since last June, FIIs are net buyers in Indian equities so far in February. Though they are net buyers of equities worth just Rs 2,645 crore, the changing world dynamics is what is making many market observers excited. The key factor to consider is whether this is the beginning of something bigger or just a blip?

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Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments pointed out that, “There has been a discernible change in FII flows in February, so far. Of the last four trading sessions, FIIs were net buyers in three sessions. An important factor that changed the market sentiment was the appreciation in rupee from a record low of 91.72 to 90.30 to the dollar.”

3 big factors that triggered FII selling and what the current scenario indicates

The last week ending February 6 has been a rather eventful one for Indian stock markets. The Budget, the much-awaited India-US trade deal soon after the India-EU trade deal was inked had a major impact on investor sentiment. The market reacted negatively to the hike in STT on F&O but recovered smartly on news of the US-India trade deal. In fact, the benchmark closed the week, up 3% each.  

However, what’s in store next – Can the India-US trade deal and the US slashing tariffs on India to 18% bring forth a wave of FII buying? 

#1 All eyes on the rupee and dollar drama

More often than not, one of the big factors why FIIs have been net sellers in India for the past 2 years has been ascribed to the rupee. In fact, the rupee was one of the worst-performing currencies in 2025. The good news is that the Indian currency is finally seeing some green. The rupee has recovered significantly from its early 2026 lows, close to 92/$. 

“Even though rupee further weakened to around 90.70 by the close on February 6th, INR is expected to stabilise and gradually appreciate to below 90 to the dollar by end March 2026. This has the potential to trigger more FII inflows into India,” said Dr. VK Vijayakumar. 

What’s really buoyed sentiment is the movement of the Dollar Index along with this. After flirting around the 99 levels for the better part of January, the Dollar Index has started February on a rather muted note, hovering around the 97 mark. The Dollar Index has declined over 1% in the last 1 month. What needs to be seen is if this is a sufficient enough decline to woo the FIIs back. 

#2 How the AI trade pans out in the Indian context

However, most analysts believe that the dollar alone cannot be a gamechanger. India has long been  at the centre of many global comparisons for the lack of adequate AI presence, and most market observers highlighted that “a lot will depend on how the AI trade pans out.”

In an earlier interview to FinancialExpress.com, Sanjeev Prasad, MD, Kotak Institutional Equities, while listing out the drivers for 2026 had pointed out that  one of the key reasons for India’s big underperformance was that it has no real AI play. “Unlike a lot of other GEM markets, particularly China, South Korea, and Taiwan, which have a lot of AI play, some of those markets have done a lot better this year. And of course, the US itself has done very well, ” he had pointed out. 

Given the recent rout in tech stocks after the new AI plugins by Anthropic driven by fears that GenAI progress will be detrimental to the future/relevance of IT services and software firms, Kotak Institutional Equities believes that there is plenty of panic about little flutter. According to them, “While there could be a reassessment of risks over time, said events alone are not influential enough to spark a sudden shift in our stance. AI progress so far has been in line with our expectations.”

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However, they pointed out that the “upside and downside risks exist. Downside risks are from faster future progress in frontier AI models and elevated focus on enhancing GenAI capabilities in IT services, particularly in software engineering.”

#3 Growth momentum turning?

Earnings is the other big catalyst going forward. While most analysts see earnings growth to average in the mid-teens, Morgan Stanley sees a case for re-rating for India. 

In their report dated February 5, Ridham Desai stated that, “We see a sharp turn in earnings growth over the coming months. India’s growth cycle is set to accelerate, backed by the reflation efforts of the RBI and the government via rate cuts, bank deregulation and liquidity infusion, continuing capex, tax cuts and a relatively stimulating budget.”

This, coupled with the India-US trade deal and thawing relations with China, is expected to have a decisive impact on investor sentiment towards India. Will that translate into more meaningful flows? Well, keep watching the space for the latest update on FII action in Indian markets.