Salzburger Tageblatt - Foreign Investors Return to Indian Markets After 10-Month Selloff

Foreign portfolio investors (FPIs) have reversed a ten-month streak of monthly equity outflows, injecting ₹53,172 crore ($6.4 billion) into Indian equities and ₹7,480 crore into government bonds during the first nine days of November. This sharp turnaround in capital flows has provided support to the rupee, lifted market sentiment as global risks ease, and signals a reassessment of exposure to domestic assets by overseas investors.

The inflow marks a decisive break from a prolonged period of weakness across Indian equities, the currency, and government bonds. Between January and October 2026, FPIs withdrew ₹4.48 trillion from Indian equities, contributing to a 2 percent decline in the Nifty 50 index over the previous year. During this period, bond yields remained elevated as foreign investors favored markets offering higher returns elsewhere.

However, the direction of flows has changed abruptly this month. In addition to the equity purchases, FPIs bought ₹7,480 crore of government securities under the Fully Accessible Route (FAR) in the first nine days of November, according to data from the Clearing Corporation of India. This represents the highest monthly inflow into FAR bonds since July, when investors purchased ₹7,581 crore. The current buying follows two consecutive months of net selling in the bond market, with outflows of ₹9,192 crore in September and ₹5,609 crore in October.

While FPIs have been net buyers of domestic debt in five of the seven months of the current financial year (FY27), net purchases for FY27 have reached approximately ₹52,939 crore. Much of this inflow occurred in June, when foreign investors bought ₹41,774 crore of government securities.

The shift in sentiment is also evident in derivatives positioning. At the close on Monday, FPIs’ long-short ratio stood at 26.8 percent, its second-highest level this year, trailing only the 29.2 percent recorded on February 23, shortly before the onset of the Iran-US conflict. The ratio had remained below 15 percent for most of the period since the conflict erupted. Although foreign investors continue to hold more short than long positions, the balance of their bets is now the least bearish since the war began.

The reversal comes after a prolonged struggle for India to attract foreign capital, as investors sought higher returns in other equity and debt markets. The absence of a compelling artificial intelligence (AI) investment theme had previously left Indian equities at a disadvantage, while AI-driven rallies propelled markets in the US and across Asia, excluding Japan, to new highs.

Several macroeconomic and geopolitical factors have contributed to the current shift. The political outcome of the US midterm elections, with Democrats winning control of Congress, has reduced the perceived risk of further escalation in the West Asia conflict. This has helped temper concerns about an inflationary shock, a key determinant of the US interest-rate outlook. A less inflationary global environment improves the relative appeal of Indian assets.

Domestic equities have also become more attractive on valuation grounds following their recent underperformance, while government bonds offer foreign investors an opportunity to earn relatively high yields. Deven Mistry and Aanshul Agarawal of Motilal Oswal Financial Services noted in a client note that India’s healthy macroeconomic fundamentals, strong corporate earnings, and a meaningful correction in valuations from their 2024 peak levels could encourage a stronger revival in FPI interest.

"Continued improvement in FPI sentiment, coupled with easing geopolitical challenges, could help offset the headwinds that have weighed on Indian markets over the past two years and lay the foundation for a sustained market rally," they wrote.

The renewed interest has coincided with a sharp rebound in domestic markets. The Nifty 50 rose 5 percent over the past five trading sessions. The inflows have also supported the rupee, which gained 1.09 percent against the dollar last week, moving past the Rs 94-a-dollar mark to its strongest level in more than four months. A softer dollar index provided additional support to emerging-market currencies.

The bond market has also rallied, with yields falling across maturities last week. Long-dated securities recorded the steepest declines, flattening the yield curve. Foreign banks and private sector banks were the principal buyers, while public sector banks, mutual funds, and primary dealers were net sellers.

"Foreign investors came in on the longer end after the fall in crude, and that helped the 10-year government bond yield fall sharply last week," said a market participant. "The buying in the 2033 and 2036 bonds shows they are comfortable adding at these levels, but we need to see if the flows hold once oil settles."

Conditions in the money market have also eased. Banking system liquidity was in surplus by ₹2.3 trillion, equivalent to 0.8 percent of net demand and time liabilities, as of November 6. The liquidity surplus widened during the week following the reversal of a 29-day variable rate reverse repo (VRRR) auction worth about ₹25,560 crore. The Reserve Bank of India (RBI) also conducted a three-day VRRR auction for ₹25,000 crore, which attracted bids worth ₹18,130 crore.

However, festival-season demand and outflows towards excise duty and tax payments prompted the central bank to conduct a four-day variable rate repo (VRR) auction worth ₹50,000 crore to meet additional liquidity requirements. The improvement in liquidity was reflected in short-term borrowing costs. The weighted average call rate (WACR), an indicator of overnight borrowing costs in the banking system, eased to 5.47 percent from 5.64 percent the previous week. The weighted average triparty repo rate declined to 5.52 percent from 5.63 percent, while the weighted average market repo rate fell to 5.46 percent from 5.60 percent.

Whether the improvement in sentiment translates into sustained foreign inflows will depend partly on this week’s economic data. October consumer price inflation is expected to rise to 5.9 percent, driven by higher food prices and an unfavorable base effect. Bond dealers expect the 10-year benchmark yield to trade in a range of 7.10-7.25 percent.

"Volumes should stay thin in a holiday-shortened week, and the market will take its cue from October CPI," said a dealer at a private bank. "Oil and the US payrolls-driven Fed rate hike risk (will decide) the direction."

Global brokerages are also becoming more constructive on Indian equities. HSBC Global Investment Research upgraded India to 'overweight' this week, citing the country’s market depth, domestic demand, and relatively resilient macroeconomic backdrop.

"In an environment where investors are seeking to diversify away from concentrated AI exposure, India stands out for its market depth, domestic demand orientation and relatively resilient macro backdrop," its analysts wrote. "Valuations, previously a key concern, have moderated back towards historical averages, while corporate earnings have remained resilient despite the economy's dependence on energy imports."

Citi raised its December 2027 Nifty 50 target to 28,000, implying an upside of 11.8 percent from Monday’s close of 25,044.65. The brokerage expects earnings to grow at about 15 percent annually over FY26-28 and oil prices to remain "below prior fears." It also expects AI capital expenditure to moderate, arguing that the outcome of the US midterm elections and elevated interest rates could constrain spending and "aid flows into non-AI assets."

Financial markets were closed on Tuesday for Diwali Balipratipada.

Q.Mander--SbgTB