By Pranit Arora

Foreign Institutional Investors (FIIs) have been withdrawing funds from Indian markets, driven by global and domestic factors. Weak corporate earnings, slowing GDP growth, and a depreciating rupee have raised concerns among investors. Additionally, high U.S. bond yields have made other markets more attractive, diverting capital from emerging economies like India. Concerns about global economic slowdown and geopolitical uncertainties have added to the cautious sentiment.

Domestic factors like high inflation, policy uncertainty, and concerns over government fiscal management have also impacted investor confidence. However, domestic institutional investors (DIIs) have been key in absorbing the selloff, stabilizing the market to some extent. They continue to inject liquidity, highlighting the growing strength of India’s domestic financial ecosystem.

While FIIs may be cautious now, they cannot afford to stay underweight in India for too long.

The return of Foreign Institutional Investors (FIIs) to Indian markets isn’t just about numbers—it’s about a story of trust, opportunity, and timing. Right now, that story is being shaped by a mix of global trends and domestic developments. Both sides of the equation will need to align before we see a meaningful wave of FII inflows.

Globally, the biggest factor is the U.S. Federal Reserve. If the Fed decides to pause or even ease its rate hikes, it would mean lower bond yields. Why does this matter? Because when bond yields in developed markets are high, they act like a magnet, pulling money away from riskier markets like India. But a shift here could tip the scales, making Indian equities look far more appealing. There’s been chatter about the U.S. President Donald Trump emphasizing better trade relations with India. If such sentiment leads to tangible action, it could reinforce India’s image as a stable and growing destination for global funds.

In India, there’s a lot that could work in our favor. For starters, Indian markets are now trading near attractive valuations—something that FIIs couldn’t say 3 months ago. This alone could spark interest, but there’s more. The ongoing Q3 corporate results will act as a report card for India Inc. Investors will be watching closely to see which sectors are thriving and whether companies can deliver the kind of growth that justifies putting their money here.

Then, there’s the Union Budget—a major event that can either set the market buzzing or leave it cautious. Policies that prioritize infrastructure and industrial growth could send a strong signal that India is serious about its long-term growth story. At the same time, measures like income tax relief could boost consumer spending, which indirectly benefits the broader market.

Any measures focusing on increased capital expenditure (capex) to boost infrastructure, industrial growth, and long-term development could attract investors. Additionally, potential income tax relief for individuals or businesses could enhance disposable incomes and consumption, indirectly benefiting the market. One key data point that stands out is that FIIs’ net long positions in India are currently quite low to 15%. This means there’s plenty of room for them to ramp up their investments. But here’s the thing: FIIs don’t just look at growth; they look at stability. Policymakers will need to walk a fine line between chasing ambitious growth and maintaining fiscal discipline. Investors need to see that India is in it for the long haul and won’t let fiscal imbalances derail the story.

The author is Founder and CEO of Univest. Views are personal.

(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)