Foreign Institutional Investors (FIIs) have shown a remarkable uptick in their buying activity in the Indian equity market, net purchasing a staggering ₹40,145 crores over the past 12 days. This shift comes at a time when geopolitical tensions between India and Pakistan are escalating and the global market landscape is undergoing significant changes. It appears that a combination of local and international factors is reshaping the FII’s investment strategies towards India.
Factors Driving FII Strategy Shift
Several elements have contributed to the evolving sentiment towards India as a prime destination for emerging market investments. The Q4 earnings reports have largely met expectations, providing a stable backdrop for investors. While certain sectors may have raised eyebrows, overall economic indicators such as growth, inflation, and manufacturing trends have sparked optimism about India’s economic resilience.
Key factors include:
- Stable Q4 earnings that align with market expectations.
- Positive economic data showcasing growth and stability.
- Anticipation of potential interest rate cuts by the Reserve Bank of India (RBI).
- A weaker dollar making Indian assets more attractive globally.
Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, explains the context behind this trend reversal. He notes, “The announcement of a 90-day pause in reciprocal tariffs by President Trump has catalyzed a recovery in global equity markets, with India being one of the notable outperformers. Furthermore, the dollar’s decline has altered the momentum that favored the U.S. post-Trump’s election. Although FII inflows may stabilize, they might be limited by modest earnings growth projected at around 5% for FY25.”
The Impact of Dollar Weakness
The ongoing weakness of the dollar has proven advantageous for the Indian market. The Dollar Index has fluctuated between 99-100 in recent weeks, marking a significant drop from its January peak of 110, reflecting an 8% decline in 2025. In tandem, the Indian rupee has gained strength, erasing losses incurred since Trump’s election victory in November 2024.
Challenges Looming Over Indian Markets
Despite the positive inflow of funds, experts caution that concerns still linger over the Indian markets. The ongoing tensions with Pakistan continue to weigh heavily on investor confidence. Following a tragic terrorist attack on tourists in Pahalgam, the Indian government has taken stringent measures, including a complete trade shutdown and restrictions on airspace usage between the two nations.
Market analyst Ajay Bagga emphasizes, “While we are witnessing robust FPI inflows and sustained domestic investments supporting the markets, the critical question remains regarding India’s response to Pakistan. With reports suggesting an imminent Indian military action, risk perceptions are heightened. Any aggressive move could trigger a swift negative reaction in the markets, which is currently a significant concern for investors.”
In summary, while the recent influx of FII investment paints a positive picture for Indian equities, the geopolitical landscape poses substantial risks that could sway market dynamics. Investors are advised to stay informed and vigilant as the situation unfolds.
