Indian markets could see foreign investor return as rupee stabilises and earnings outlook improves

Analysts say that a steadier rupee and better earnings growth prospects could lure foreign institutional investors (FIIs) back to Indian equities. In May 2026, FIIs sold Rs 30,374 crore, taking cumulative 2026 sales to Rs 222,343 crore, surpassing the Rs 166,283 crore sold in 2025. Dr V K Vijayakumar of Geojit Investments attributes the outflows to weak domestic earnings, stronger earnings growth elsewhere, high U.S. bond yields and rupee depreciation.

While liquidating large‑cap stocks, FIIs have continued buying small‑ and mid‑cap shares where growth prospects look better. Domestic institutional investors (DIIs) remained net buyers, adding Rs 16,950 crore over the last five trading days, and the benchmark indices have shown heightened volatility. Jefferies notes that strong domestic inflows via systematic investment plans (SIPs) are also pressuring the rupee.

The outlook suggests that if earnings recovery materialises and the rupee steadies, FIIs may shift from sellers to buyers, supporting market stability.