Cheap stocks aren’t enough: The one trigger FIIs need to return to India

Foreign institutional investors (FIIs) have pulled nearly $64 billion from Indian equities over the past two years, yet cheaper valuations and a stronger earnings outlook have failed to bring them back. The missing trigger, according to JM Financial, may be a sustained decline in crude oil prices.

FIIs net sold $59.2 billion in the 24 months through September 2026. Including October’s month-to-date outflows of about $5 billion, the exit has widened to roughly $64 billion. The sell-off is now the longest and deepest in a two-decade dataset. Foreign investors sold $14.9 billion in FY25, $21.9 billion in FY26 and another $17.7 billion in FY27, including October’s selling.

The report identifies Brent crude as the key threshold variable for foreign flows. Brent prices above $105 a barrel have historically coincided with sustained FII selling, while a decline below $90 has marked the point at which selling pressure begins to ease.


Brent was at about $115 a barrel in late October, well above the level that could support a meaningful return of foreign capital.

Also Read: FII retreat deepens: Almost every second Nifty stock sees stake cuts in all 3 quarters of 2026

Cheap Nifty vs FII outflows

Nifty’s one-year forward price-to-earnings multiple has fallen to 17.1 times, translating into an earnings yield of 5.8%. That is below the 24.8 times multiple recorded in September 2024, when the earnings yield was just 4%.

JM Financial’s analysis suggests that valuations do matter but with a lag. Earnings yield has little relationship with FII flows in the same month, but correlates positively with flows four to five months later. Since 2021, the relationship has been stronger.

Periods when the Nifty traded between 15 and 18 times forward earnings were followed by average inflows of $14.1 billion over the next 12 months.

India’s economic growth has also failed to reverse the outflow. The economy grew 7.8% year-on-year in the first quarter of FY27, while FIIs sold $13.4 billion during the period. The contrast is even sharper in the report’s historical examples. In June 2020, India’s GDP contracted 23.1%, but FIIs bought $4.2 billion. In March 2026, GDP grew 8.6%, yet foreign investors sold $15.8 billion, the largest quarterly outflow in the dataset.

Earnings are improving as well. Nifty 50 profit growth stood at 12.9% year-on-year in the first quarter of FY27, while JM Financial expects growth of 20.6% in the second quarter. It estimates earnings growth of 14.2% for FY27 and 17.9% for FY28.

But earnings growth has only a small positive relationship with FII flows. Stronger profits may improve the market’s valuation case, but they are not sufficient to trigger an immediate reversal.

Why oil is the real pressure point

Brent crude has no meaningful relationship with FII flows over the full 20-year period. However, the relationship becomes more significant in recent years and at extreme price levels.

Since 2016, Brent has averaged above $105 a barrel in seven months. FIIs sold in six of those months, with average outflows of $4.1 billion. By comparison, monthly flows averaged positive $700 million to $900 million when Brent was below $75.

Since 2021, a 10% decline in Brent has been associated with about $1.5 billion of additional FII inflows in the same month.

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The report therefore identifies two crude price markers. Brent needs to fall below $105 to move out of the danger zone. A decline below $90 would mark a more decisive shift towards neutral conditions. Until then, falling valuations could remain insufficient to offset the macroeconomic risk posed by expensive oil.

The rupee is often viewed as a factor influencing foreign flows. JM Financial’s analysis suggests the direction of causality is largely the reverse.

Past FII flows help predict the next month’s movement in the rupee, but previous currency moves do not reliably predict FII flows. “The rupee is a thermometer, not a lever,” the analysts wrote.

The FII retreat has not translated into an equivalent market collapse because domestic institutions have absorbed much of the selling.

Domestic investors bought $91.7 billion over the past 12 months, including $53.4 billion from mutual funds, compared with $39 billion of FII selling in the secondary market.

Since March 2026, DIIs have bought $56.3 billion against $32 billion of FII secondary market selling. FII ownership fell from 19.9% of market capitalisation in March 2016 to 14.2% in June 2026. DII ownership rose from 11.3% to 18.9%, overtaking foreign investors in December 2024.

But domestic buying has largely cushioned the market rather than triggered a broad-based recovery in foreign participation.

When could FIIs return?

JM Financial’s base case assigns a 45% probability to Brent remaining between $100 and $115 a barrel. Under that scenario, valuations provide support but oil continues to cap the market, with the first three-month run of inflows expected in January-March 2027.

The firm estimates FY27 inflows of $15 billion to $20 billion and FY28 inflows of $10 billion to $15 billion in this scenario.

A de-escalation in West Asia could bring the recovery forward, potentially leading to FY28 inflows of $20 billion to $25 billion. But further escalation could delay the reversal and result in FY28 outflows of about $10 billion.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)