Foreign investors are beginning to rebuild their exposure to Indian equities after months of heavy selling, but their return is not yet a broad bet on the market, according to Sanjeev Prasad, MD & Co-Head of Kotak Institutional Equities. Investors remain cautious on traditional large-cap sectors such as consumer companies and IT services, while manufacturing-focused mid caps and small caps are attracting greater interest.
Foreign portfolio investors invested Rs 12,921 crore in Indian equities in the first week of August, following Rs 20,200 crore of buying in July, according to CDSL data. The buying marks a reversal after four consecutive months of heavy selling, although FPIs have still withdrawn Rs 2.41 lakh crore from Indian equities in 2026 so far.
Prasad said conversations with overseas investors suggested that sentiment towards India was improving, but few investors had moved to an outright bullish position. In more than 100 interactions with foreign investors over the past month, he said, only one had moved to an overweight position.
"Most of them have reduced the big underweight position somewhat," Prasad said in an interview with NDTV Profit. Some investors had moved from a large underweight to a smaller underweight, while others had moved from underweight to neutral, he said.
FPI Turnaround
The recent buying follows withdrawals of Rs 49,340 crore in June, Rs 32,963 crore in May, Rs 60,847 crore in April and Rs 1.17 lakh crore in March. FPIs had invested Rs 22,615 crore in February before the selling streak began.
The latest inflows have been supported by improving macroeconomic conditions, expectations of US interest-rate cuts, lower crude prices and a stable rupee.
Prasad said the foreign-investor response was becoming more selective. Traditional global funds remain cautious, while international funds that are not required to invest in India have started taking positions in specific companies.
Some of those investors are looking at hard-asset businesses such as airports, ports and real estate. Consumer technology and fintech companies with distinct business models and strong growth are also attracting interest, he said.
Mid-Cap Interest
Manufacturing is emerging as a particular area of interest for foreign investors, with Prasad seeing significant interest in Indian mid caps and small caps.
"These are people who have looked at India for some time and they have a fair amount of work in the mid-cap and small-cap names, particularly in manufacturing," Prasad said.
Investors are looking for high-growth companies in these segments even though valuations appear high in the near term, he said. The relatively smaller market capitalisation of these companies limits how much foreign money can be deployed, but the interest itself is increasing.
The shift comes as foreign investors remain reluctant to return to some of the traditional sectors that previously attracted a large share of overseas capital.
Consumer companies continue to face valuation concerns, while interest in IT services remains weak. Some private banks also have their own challenges, Prasad said.
"If money has to come back in the large caps, I assume it's in the lenders," he said.
Earnings Resilient
The improving investor mood is also being supported by corporate earnings.
Companies in the Nifty 50 that had reported at the time of the interview were showing profit growth of about 18% from a year earlier, according to Prasad. Aggregate net profit was about 7% above expectations, while EBITDA was about 3% ahead of estimates.
The performance was stronger across Kotak Institutional Equities' broader coverage universe of about 325 stocks. Net profit was about 20% above expectations, helped by oil and gas companies. Excluding oil marketing companies, the profit beat was about 10%, Prasad said.
"Numbers have been actually pretty decent," he said.
He also pointed to signs of resilience in both consumption and investment despite the broader macroeconomic uncertainty.
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Macro Support
Lower crude prices have reduced one of the key risks for India's external finances.
Brent crude was around $85 a barrel at the time of the interview, compared with expectations of about $120 a barrel three months earlier. Prasad said an average crude price of $85 a barrel for the full year, which is Kotak's base estimate, would remain manageable for India.
The firm expects a current-account deficit of about 0.5% of GDP, or around $60 billion. Higher capital inflows should more than offset that gap, Prasad said.
Kotak estimates around $120 billion of capital flows from debt inflows, foreign investment and external commercial borrowings. That could result in a balance-of-payments surplus of $60 billion to $70 billion, compared with a deficit of about $25 billion in the previous financial year.
Prasad said a more stable rupee could further improve the appeal of Indian equities to overseas investors.
Financial Value
Financial stocks remain the clearest source of value in the Indian market, according to Prasad.
Bank credit growth reached 19% in June, driven by industrial and retail lending. Asset quality also remains stable across broad parts of the lending sector, while net interest margins appear to be stabilising, he said.
"Banks are looking reasonably valued in the context of fairly strong credit growth," Prasad said.
Manufacturing and long-term consumer sectors offer stronger growth prospects if India continues to expand domestic manufacturing and government spending. But valuations are already high in many of those areas, creating a constraint for investors looking to increase exposure.
For now, that leaves foreign investors looking for specific opportunities rather than making a broad return to Indian equities.
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