FPIs pour Rs 21,715 crore into Indian stocks in 10 days; is record sell-off finally reversing?

Foreign portfolio investors (FPIs) have invested $2.29 billion, or Rs 21,715 crore, into Indian equities over the past 10 days, signalling a possible shift in foreign investor sentiment as domestic growth strengthens and corporate earnings beat expectations.

The inflows come amid growing expectations that the government's review of capital market taxes, including long-term capital gains (LTCG) tax, could help attract overseas investors back to Indian equities.

Global brokerage Nomura believes foreign institutional investors (FIIs) may be nearing the end of their record-breaking selling spree, with moderating outflows coinciding with stronger-than-expected corporate earnings and valuations that have slipped below their post-pandemic averages.


The earnings trajectory is showing signs of improvement. Of the 134 companies in Nomura's BSE 200+ universe that had reported results, normalised profit after tax (PAT) grew 34% year-on-year, beating consensus estimates by 18%. Excluding oil and gas companies, profit growth stood at 29%, still 5% above expectations.

Nomura said foreign flows could revive in the near term, given that investor expectations remain low and valuations across most sectors are below their post-pandemic averages.

Indian equities have gained 6% in dollar terms since October 8, outperforming most global markets. The Nifty has also outperformed AI-heavy indices in South Korea and Taiwan, as well as the Nasdaq, amid a correction in global AI stocks.

This relative outperformance could improve the appeal of Indian equities among global investors, particularly if corporate earnings remain resilient and concerns over global technology valuations ease.

Nomura said a potential reduction in LTCG tax for foreign institutional investors, falling global bond yields and expectations of continued support for the rupee through central bank intervention could further improve investor sentiment.

Crude oil prices remain a risk to India's macroeconomic outlook, although they have already corrected 7% from their recent peak.

The combination of stronger earnings, lower valuations and easing foreign investor selling could also provide an upside trigger for the Nifty, potentially taking it beyond Nomura's March 2027 target of 24,000. The brokerage's target is based on a valuation of 17 times estimated FY28 earnings per share (EPS).

LTCG tax relief in focus as government reviews capital market levies

The debate around reducing capital gains taxes has gathered momentum as policymakers reassess the tax structure for financial markets.

ALSO READ: $64 billion out, $5 billion in? Why LTCG tax cut may not be enough to bring FIIs back

Earlier on Monday, Reuters reported that the Securities and Exchange Board of India (Sebi) had recommended removing LTCG tax for foreign investors. The recommendations are not binding, with the final decision resting with the government ahead of the February Budget.

Under the current tax regime, listed equities attract a 20% short-term capital gains (STCG) tax and a 12.5% LTCG tax, in addition to STT.

For foreign investors, capital gains tax is calculated on rupee-denominated gains rather than dollar returns. Consequently, investors can incur a tax liability even when their gains in dollar terms are substantially lower or when rupee depreciation has resulted in a dollar-denominated loss.

Can LTCG exemption bring back foreign investors?

Foreign institutional investors have withdrawn nearly $64 billion from Indian equities over the past two years, but lower valuations and an improving earnings outlook have so far failed to trigger a sustained return.

According to JM Financial, a sustained decline in crude oil prices could be the missing catalyst for a meaningful revival in foreign inflows.

The brokerage estimates that scrapping LTCG tax for foreign investors could add $3-5 billion to FY28 inflows in its bull-case scenario, against nearly $64 billion withdrawn from Indian equities since October 2024.

JM Financial estimates that the tax exemption could improve an average foreign investor's annual dollar returns by around 2.2 percentage points. However, it describes the proposed tax relief as a "second-order lever", with valuations and crude oil prices remaining important factors influencing foreign investor allocations.

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

The brokerage estimates that a one-percentage-point expansion in the Nifty's price-to-earnings (P/E) multiple could translate into a 5.8% gain.

A recovery in the index's forward earnings multiple from the current 17.1 times to its 10-year average of 21.3 times would imply a valuation gain of 24.3%, according to JM Financial.

Disclosure: This article has been written by Kumar Gaurav, who is not a Sebi-registered Research Analyst or an Investment Adviser. Gaurav and their ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective Sebi-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here