₹46,000 crore inflows in 19 sessions! Will US-China trade deal drive FIIs away from Indian stock market?

Foreign Institutional Investors (FIIs) have been net buyers for 17 out of the last 19 sessions, pouring in 46,003.66 crore into the Indian stock market during this period. However, now that the overhang on Chinese stock markets seems to be dissipating following a trade agreement with the US, investors are analysing whether foreign institutional investments in India will remain stable in the near future.

On Monday, the US and China reached an unexpected agreement to significantly reduce tariffs on each other's products for an initial period of 90 days, resulting in a decrease in tensions related to their ongoing trade conflict and a positive impact on global markets.

Following this, strategists at Nomura Holdings Inc. revised their outlook for Chinese stocks to a ‘tactical overweight,’ noting that the trade truce between the US and China is a major benefit for equities in the Asian country. Bullishness on Chinese stocks have made investors wary whether it would prompt FII exit from the Indian stock market.

In the first quarter of this year, FIIs were consistent sellers of Indian stocks. Significant selling commenced in January ( ₹78,027 crore) when the dollar index reached its peak of 111 in mid-January. Following this, the pace of selling began to ease. FIIs shifted to buying in April, with a total purchase of ₹4,243 crore. Both global and domestic factors have been driving the increase in FII inflows into Indian equities.

“Capital flows, whether domestic or foreign, play a vital role in shaping the direction and health of the capital markets. Still, we see FIIs are market movers. Despite the rise in domestic participation, FII flows continue to carry weight, especially in large-cap segments and index movements,” said Prashanth Tapse, Research Analyst, Senior Vice President of Research at Mehta Equities.

Will FII inflows remain sustainable in the near-term?

Analysts observe that global markets are currently experiencing volatility, fluctuating in response to constantly shifting policy developments.

The impact of Trump's reciprocal tariff strategy, which previously created disruptions in the markets, seems to be over, with a new agreement reached between the US and China. It appears that the trend of a declining dollar has come to an end, and the yield on US 10-year bonds has surged to 4.47%, which may affect FII investments in India that have been supporting the resilience of the Indian market.

Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, said that the recent sustained FII inflows into India are unlikely to sustain in the context of the deal between the US and China. The macro construct of a weakening dollar and potential slump in US and Chinese GDP growth has been altered by the new developments. 

However, the strong domestic inflows into the market and the improving prospects for three more rate cuts by the MPC due to low inflation will keep the Indian market resilient, Vijayakumar added. FIIs may not turn aggressive sellers in India in such a scenario, he believes.

Key factors that influence FII investments in EMs

According to Prashanth Tapse, FIIs often invest based on many factors, valuations being the most important one but they are more reactive to global cues like interest rate Mmvements (especially US Fed policy), dollar index movement as a stronger dollar typically leads to capital outflows from EMs like India, geopolitical tensions, and volatility in bullion & commodity prices.

“The Indian equity market has matured significantly in the last decade, and while FII flows remain important, they are no longer the dominant force they once were,” added Tapse.

Further, talking about the rise of Domestic Institutional Investors (DIIs) — particularly mutual funds, insurance companies, and pension funds — along with a growing base of retail investors, Prashanth believes that it has brought a major shift in market dynamics.

“Structural strength of ‘New India’ monthly SIPs has been a game changer in the last 2-3 years, hitting record highs over ₹25,000 crore/month. This domestic liquidity flow can be a predictable and resilient source of funding for the equity markets, even during global uncertainty,” explained Tapse.

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