Volatility in Foreign Investment Eases as Indian Markets See Recovery

Foreign institutional investment in India showed a strong recovery in late October, with markets buoyed by solid macroeconomic fundamentals and robust domestic liquidity despite earlier volatility and year-to-date outflows.

Easing Volatility in Foreign Institutional Investment

According to a report by Motilal Oswal Financial Services, volatility in foreign institutional investment flows, which has remained a key overhang for Indian markets, appears to be easing, with FIIs witnessing a strong recovery in the second half of October after sustained selling in the previous month. FIIs recorded net outflows of USD 2.2 billion from Indian equities in October 2026. However, their investment activity reversed in the second half of the month, with net inflows of USD 2.8 billion, following outflows of USD 5 billion in the first half.

Motilal Oswal said India's healthy macroeconomic fundamentals, strong corporate earnings, improved valuations and robust domestic liquidity could help attract foreign investors if global investment sentiment improves. The report noted, "Given India's healthy macroeconomic fundamentals, strong corporate earnings, a meaningful correction in valuations from their 2024 peak levels, and robust domestic liquidity, any moderation in the global AI trade could encourage a stronger and more sustained revival in FII interest in relatively underperforming EMs such as India."

Sector-Specific Investment Trends

Sector-wise, foreign investors continued to remain selective, with technology and telecom attracting the highest inflows in October, while FMCG, financial services and automobiles witnessed the heaviest selling. FIIs invested USD 1.4 billion in the technology sector and USD 700 million in telecom during October. On the other hand, they withdrew around USD 1 billion each from FMCG and financial services, while automobile stocks saw outflows of USD 800 million.

Domestic Institutional Investor Strength

The report also highlighted the continued strength of domestic institutional investors (DIIs), who invested USD 6.3 billion in Indian equities during October, extending their buying streak to the 39th consecutive month. On a year-to-date basis, FIIs have withdrawn a record USD 30.4 billion from Indian equities in calendar year 2026. Financial services witnessed the highest outflows of USD 13.2 billion, followed by automobiles at USD 4.9 billion and FMCG at USD 4.5 billion. In contrast, services, metals and capital goods attracted foreign investments during the period.

Market Outlook and Future Potential

Motilal Oswal said easing foreign investor selling in large-cap-heavy sectors had also supported the relative performance of large-cap stocks compared with mid- and small-cap stocks. Looking ahead, the brokerage said an improvement in foreign investor sentiment, alongside easing geopolitical challenges, could provide support to Indian equities. It stated, "Continued improvement in FII 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."

The report also pointed to the possibility of India benefiting from a moderation in the global artificial intelligence investment theme, as investors reassess returns from heavy spending on AI infrastructure and technology. Global markets faced pressure in October amid concerns over interest rate hikes, elevated bond yields, higher crude oil prices and uncertainty surrounding returns on AI-related capital expenditure. Despite these external pressures, Indian equities rebounded from their lows, supported by domestic institutional buying and improving market sentiment. (ANI)

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