When will FIIs come back to India? Why the ‘AI Trade’ and crude above $100 are keeping foreign investors away

The net FII selling for 2026, so far, stands at over Rs 1.91 lakh crore. Given the pace of the selloff, one primary concern that bothers most investors is “When will FIIs come back to India?”

What’s driving capital outflows?

In this context, one must first understand what triggered the outflow. Experts highlighted that one factor that has abetted the exodus of foreign capital from India is the lack of meaningful AI-play. Speaking to Anant Goenka, Executive Director, The Indian Express Group, at the Express Adda on April 28, the celebrated market guru, Chairman of Rockefeller International, Founder & CIO of Breakout Capital and acclaimed author Ruchir Sharma had pointed out that the lack of AI infrastructure is one of the biggest reasons why foreign investors are indifferent towards India at the moment. “The focus is on the winners of AI and the losers of AI. Unfortunately for India, in contrast to what happened during the tech boom (1999-2000), most foreigners have taken the view that India is a loser in the AI context,” he added.  

Reiterating the global trend of buying in AI stocks, VK Vijayakumar, Chief Investment Strategist, Geojit Investments, explained that “an important factor driving capital flows is the AI trade, particularly in South Korea and Taiwan. Two companies in South Korea – Samsung and SK Hynix- and one in Taiwan- TSMC- are attracting the lion’s share of these inflows.”

He believed that “a significant trend in FPI flows this year is that Japan, South Korea and Taiwan are attracting significant inflows while India and some other emerging markets, which are facing headwinds from the energy crisis and currency depreciation, are facing outflows.”

Weak rupee, crude above $110 adds to concerns

A weak rupee and elevated crude prices haven’t been helping sentiment either. In fact, the currency has now slipped to an all-time low below 95/$. The rupee has already depreciated 5% in 2026. In the same period, the Dollar Index rebounded from 4-year lows and is holding close to 2026 highs. In the last 3 months, the greenback has gained 1%.

What’s been a double whammy of sorts has been the crude price movement in the corresponding period. It has surged to multi-year highs. The last time crude soared to these levels was in 2022. Most brokerages have revised their 2026 target to above $100/bbl. Ever since the beginning of the tension across West Asia, crude oil prices have gained over 55%. 

According to the PL Capital report, “FII outflows were accelerated by a triple pressure cycle – FIIs sold Rs 1.22 lakh crore in March, one of the largest monthly outflows on record. The mechanism: crude surging widens the current account deficit, which pressures the rupee, which amplifies currency depreciation risk for foreign investors, which further accelerates outflows. This self-reinforcing cycle was compounded by a structural shift in global capital toward AI and semiconductor themes, where India lacks dominant listed exposure.”

FIIs chase price, not trends

The combination of these factors has no doubt weighed on sentiment. However, DSP MF pointed out that it is only a part of the story. This is because “equity prices do not move because FIIs buy. Like most investors, FIIs chase price. They usually do not create trends.”

They elaborated on how several factors have come together. The country’s “capital account has recently slipped into deficit. The reasons are visible. Weak FDI, inflows, and FPI outflows. Large outward investments by Indians. Easy exits through IPOs, FPOs and OFS. Stretched equity valuations. A shaky macro backdrop. That is precisely why this may be a strong contra signal.”

India Vs global peers: The good, bad and ugly 

The question then is, how does India appear in the global context at the moment? DSP MF drew a picture of the current realities. On the one hand, one can see “more reasonable valuations. In some pockets, perhaps even cheap ones, especially in large, high-quality, liquid-listed firms. More importantly, the Indian Rupee is near one of its weakest REER levels in many years.”

And many of India’s macro stresses now look near their peak; they believe that these “are more likely to be priced in than ignored. Historically, the biggest foreign inflows into India have come when valuations were cheap or at least reasonable. Not when optimism was highest.”

The DSP MF calculation pointed out that, “If there is a period after the Covid-19 crash when FPI and FDI flows can begin to improve again, it is around this zone.”

India’s valuations are edging towards ‘fair’

According to DSP MF, they have dropped their “conservative stance on equities. A few signs suggest that the current correction is suitable for adding equity exposure in moderate proportions.”

They believe valuations, especially in large caps, are now close to long-term averages. The Nifty’s trailing price-to-earnings multiple has fallen below 20x. On Q4FY26 estimates, it is already below 19x, around its long-term average of 18.9x. Is 18.9x cheap? DSP MF is emphatic in saying “not really. It is still slightly above what may be fair. At a 16% ROE and earnings growth of 10-12%, the index should likely trade at 16.5x to 18x. That means valuations are now between fair and average.”

They believe it is prudent to start raising equity weights while the market is falling and moving closer to fair value. For small and midcaps, though, a more cautious approach is warranted. 

India’s valuation premium a function of ‘peer decay’

At 18.9x, India’s valuation is certainly not cheap, but most see the current levels hovering between the fair and average valuation levels. The Nifty is still above average valuations vs EM peers, but one must also understand where the peer is stemming from. 

“India’s premium versus other EMs has come on the back of deterioration in ROEs & earnings of peers rather than India’s absolute improvement,” DSP MF added. 

Conclusion

While it is hard to predict when FIIs will make a comeback unless one has the magic crystal ball to gaze into the future, most experts believe that the FII interest in India would be a function of multiple factors. Both local and global aspects need to be considered. No single catalyst could perhaps be a game-changer anymore. It is more a sum of parts.