Foreign investors, FIIs In Focus: Foreign investors are not exiting India but becoming more selective, with selling in the secondary market reflecting a broader global risk-off environment even as interest in IPOs and other primary-market opportunities remains relatively strong, Dheeraj Gaur, Chief Investment Strategy Officer at Choice Wealth told NDTV Profit in an exclusive email interview.
Gaur describes the current foreign-investor positioning as “reallocate, not abandon”, arguing that elevated US yields, crude prices, a weaker rupee and the rotation towards the AI trade in Taiwan and Korea are driving the current shift.
India's fundamentals, meanwhile, remain strong, with GDP growing 7.8% in Q1 FY27 and Q1 earnings remaining strong. Gaur believes that once the global macro backdrop stabilises, foreign investors could return to the Indian secondary market. Edited Excerpts:
Q: Foreign investors have turned cautious on Indian equities even as interest in IPOs and other primary-market opportunities remains relatively strong. What do you think this divergence is telling us about how FPIs are currently viewing India, and what could bring them back to the secondary market?
This divergence tells us FPIs are not exiting India; they are becoming selective. The selling in the secondary market is a global story, not an India story.
With US 10-year yields over 5%, a Fed that has resumed hiking, Brent over $100 and the rupee around 95.6, global investors are cutting risk across emerging markets and a large part of that money is chasing the AI trade in Taiwan and Korea. India's fundamentals, meanwhile, remain among the strongest globally — GDP grew 7.8% in Q1 FY27 and Q1 earnings remain strong.
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That is why FPIs are still buying fresh paper in IPOs, where they get access to new sectors, fair price discovery and meaningful allocation size. So, this is “reallocate, not abandon”.
We also need to look at the quality of what India offers. Markets like Taiwan and Korea are essentially concentrated bets on a handful of chip stocks. TSMC alone is over 40% of Taiwan's benchmark, and Samsung and SK Hynix together crossed 42% of the Kospi.
India, by contrast, is a broad and evenly spread market, with financials, consumption, industrials, materials, energy, healthcare and IT all carrying meaningful weights. For a global investor, that diversification means India's growth is driven by the whole economy, not by one global cycle. That makes India a natural hedge if the AI trade cools, which at some point will, especially with calls to slow down the AI race getting louder.
Because of this rotation, India's weight in the MSCI Emerging Markets index has roughly halved, from about 20% in mid-2024 to around 11% by May 2026. That is broadly in line with its long-term average and foreign ownership is at a 17-year low. In our view, that is not a verdict on India; it is a positioning posture.
As crude settles below $90, US yields peak, the rupee stabilises and earnings upgrades continue, India's weight should recover.
Because foreign investors own so little today, the return to the secondary market can be quicker than many expect.
Q: With crude remaining highly sensitive to developments in the Middle East and the US-Iran conflict, how significant is the oil shock for Indian equities at current levels? Which sectors or parts of the market do you see as most vulnerable if elevated crude prices persist?
Crude is one of the biggest macro risks for India right now. India is the world's third-largest crude importer, so every sustained elevated crude price feeds into the trade deficit, the current account and the rupee.
That is already visible. The current account deficit widened to $4.2 billion, or 0.5% of GDP, in Q1 FY27 from $3.4 billion a year ago. A weaker rupee then erodes dollar returns for FPIs and adds to outflows.
No doubt, the number is significant, but it is definitely manageable, because strong services exports are cushioning the gap, while rupee depreciation also helps a bit.
At the sector level, the impact is uneven, so the right response is selective, not sector-wide. The most vulnerable are businesses where crude is a direct cost:
- Oil marketing companies, if retail fuel prices are not revised.
- Aviation, where jet fuel is one of the largest operating costs.
- Paints, tyres and specialty chemicals, which use crude derivatives as raw material.
Rate-sensitive sectors may also be impacted as inflation and Fed rate hike pressure starts to build up, pushing RBI to hike.
Q: Given the combination of global yields, crude prices, rupee pressure, geopolitical risks and domestic earnings, what are the key signals you would watch over the next few weeks to determine whether the current FPI selling is a temporary risk-off phase or the beginning of a more prolonged period of foreign outflows?
As discussed earlier, FPI behaviour right now is being driven more by global geo-politico-economical signals than by anything specific to India. Yes, earnings growth expectations remain high.
Foreign investors turned sellers in early September despite India reporting stronger-than-expected GDP growth of 7.8% for the April-June quarter, which tells you the trigger is external. I would watch five signals over the coming weeks.
US rates: The Fed raised rates by 25 bps, and the 10-year Treasury yield pushed above 5%. Traders see a 53% chance of an October rate hike. A pause, with the 10-year retreating toward the 4.75%-5% band, would ease EM pressure materially. A second hike would probably extend the outflow cycle.
Crude: Brent sustainably below $90 on a credible US-Iran deal would be the single biggest positive trigger for India. A move toward $110-$120 would be the biggest risk.
Rupee: It remains weak, but well off the all-time high of 99.82 per dollar reached in March 2026. More than the level, RBI looks to manage volatility in currency, which is a bigger risk. Stability will reduce currency losses for foreign investors, while a renewed slide would accelerate exits.
Earnings: The Q2 FY27 results season from mid-October is crucial. If EPS estimates hold or are upgraded despite elevated crude, the case for FPIs returning strengthens considerably.
Our base case is that this is a temporary risk-off phase, not a structural exit. Indian equities across July and August, showing how quickly they return once the macro backdrop stabilises. Meanwhile, domestic flows continue to absorb supply.
For long-term investors, this phase is an opportunity to build positions gradually rather than to exit.
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