FIIs are coming back: Can Indian stocks sustain buying for 3rd consecutive month in September?

Foreign investors are making a decisive return to Indian equities, with FPI inflows crossing $3.2 billion in August, the strongest monthly inflow since September 2024, even as the Nifty and Sensex fell more than 1% during the month.

Overseas investors also remained net buyers across sectors in the second half of August, marking their second consecutive fortnight of inflows, with 10 sectors attracting foreign money between August 16 and August 31, according to National Securities Depository (NSDL) data.

The buying momentum has carried into September, with foreign portfolio investors pouring Rs 2,374 crore into Indian equities in the first four days of the month.

What’s behind this?

“The tapering of the chip trade and the FPIs turning consistent sellers in the chip stocks in South Korea and Taiwan have played an important role in bringing the FPIs back to India,” V K Vijayakumar, Chief Investment Strategist at Geojit Investments Ltd said.

The resilience of the Indian economy, as indicated by the Q1 FY27 GDP growth rate of 7.8%, and the better-than-expected Q1 earnings numbers and stabilisation of the rupee are other positive factors that have the potential to sustain the positive FPI inflows into India. The massive $127 billion that came to India under the FCNR (B) scheme has strengthened the rupee significantly from the low of 96.96 to the dollar in May to 94.49 on 4th September.

“This is hugely significant from the FPI perspective,” Vijayakumar noted. However, going forward, the FPI flows will be primarily influenced by the bond yields which are rising globally. “It would be irrational to expect significant FPI flows into India when the U.S. 10-year bonds and 30-year bonds are yielding 4.78% and 5.27% respectively.”

HSBC says $25 billion inflows on the cards

More than 80% of active global emerging-market funds are underweight in India. If those funds simply restore their allocations to neutral, the shift could generate around $25 billion of inflows, HSBC strategists Prerna Garg, Herald van der Linde and Yogesh Aggarwal said in a report.

“FII outflows linked to AI rotation have largely played out,” the strategists said. A return to neutral by underweight funds alone “could drive around USD25bn of inflows.”

The potential reallocation would mark a significant reversal for Indian equities after foreign investors diverted capital toward markets benefiting more directly from the artificial-intelligence trade. HSBC now sees those positions becoming increasingly crowded, while sharp swings in AI-exposed markets are strengthening India’s appeal as a diversification play.

FII activity in August

Consumer Services attracted the highest inflows during the fortnight, with Rs 5,019 crore flowing into the sector. This took the sector’s total inflows for August to Rs 8,417 crore. The buying follows a strong July, when the sector recorded inflows of Rs 10,191 crore. Cumulative inflows over the last three months have now reached Rs 19,787 crore.

Financial Services followed closely, attracting over Rs 4,000 crore from FIIs during the fortnight. In the rolling two-month period from June to August, the sector received total inflows of Rs 16,570 crore.

SBI Securities said the return of foreign buying suggests that selling pressure on the sector has eased, with investors gradually rebuilding their exposure. The brokerage noted that Financial Services had recorded Rs 12,303 crore of outflows between March and May.

Healthcare attracted Rs 3,021 crore during the second half of August. Over the rolling two-month period, the sector received Rs 12,076 crore of inflows. According to SBI Securities, stocks exhibiting a positive price action structure include Divis Lab, Glenmark, Ipca Lab, Laurus Lab, PPL Pharma and Zydus Life.

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