Is Dalal Street heading for a sustained rally? Motilal Oswal says FII flows on the cusp of an inflection

As foreign investors ramp up their purchases on Dalal Street following months of massive selling, Motilal Oswal Financial Services has struck a positive note, saying that continued improvement in FII sentiment, along with easing geopolitical challenges, could help offset the headwinds that have weighed on the Indian market over the past two years and lay the foundation for a sustained market rally.

The Indian stock market rebounded from its lows even as most global markets witnessed a sell-off in October 2026, delivering negative returns amid rising concerns over interest rate hikes and growing questions about whether investments in AI infrastructure and capex had run too far ahead of potential returns, Motilal Oswal said. It added that elevated bond yields, higher crude oil prices and heightened volatility further dampened global risk sentiment, triggering capital outflows from AI- and technology-heavy markets and sharper market declines.

Markets also adopted a risk-off stance in October this year amid uncertainty surrounding the outcome of the US midterm elections, prompting investors to pare their exposure to global equities. Against this backdrop of persistent headwinds, FII outflows continued in October 2026 following the sharp sell-off in September 2026, with net outflows amounting to $2.2 billion during the month, the domestic brokerage pointed out. However, FII activity witnessed a strong recovery in the second half of October 2026. In contrast, DIIs maintained their strong buying momentum, recording net inflows of $6.3 billion during the month.


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Which sectors saw the sharpest FII outflows?

Motilal Oswal pointed out that FIIs have sold a record $30.4 billion worth of Indian equities in calendar year 2026. Financial Services ($13.2 billion), automobiles ($4.9 billion) and FMCG ($4.5 billion) witnessed the sharpest FII outflows, while services ($1.4 billion), metals ($1.3 billion) and capital goods ($1.1 billion) attracted the highest inflows.

So far this year, services emerged as the most preferred sector among FIIs, while financials remained the least preferred. This marked a clear shift from 2025, when telecom ($5.5 billion) was the most preferred sector and technology ($8.6 billion) remained the least preferred.

FII volatility appears to be easing

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 emerging markets such as India, said Motilal Oswal Financial Services.

It added that easing FII selling in large-cap-heavy sectors also supported the relative outperformance of large caps over SMIDs during the month. "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," it further said.

Also read | FIIs extend buying momentum on Dalal Street with Rs 7,212 crore inflows; DIIs continue equity sell-off

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