Foreign institutional investors (FIIs) could return to Indian stock markets once the rupee stabilises and earnings growth prospects improve meaningfully, analysts said on Sunday, 24 May 2026. The assessment comes as sustained FII outflows continue to weigh on benchmark indices and the domestic currency.

Scale of FII Selling in 2026

FII selling in May 2026 alone stood at ₹30,374 crore, pushing the total outflow for the year so far to ₹2,22,343 crore. That figure already surpasses the full-year FII sell figure of ₹1,66,283 crore recorded in 2025, signalling an accelerating trend of foreign capital withdrawal from Indian equities.

What Is Driving the Sustained Outflows

Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments Ltd, identified four principal drivers behind the persistent selling: subdued earnings growth in India, comparatively stronger earnings prospects in rival markets, elevated bond yields — particularly in the US — and rupee depreciation. 'These factors, at least some of them, should change in India's favour for the FIIs to turn buyers in India,' he said.

Notably, even as FIIs have been offloading largecaps, they have continued buying in small and mid-cap (SMID) equities where growth and earnings visibility remain relatively stronger. Vijayakumar said this pattern confirms that earnings quality, not sentiment alone, is the primary determinant of FII allocation decisions.

Early Signs of Earnings Recovery

There is a silver lining in recent corporate results. 'An important takeaway from Q4 results is that there are indications of earnings recovery,' Vijayakumar said. If this trend sustains through the next two quarters, it could provide the fundamental catalyst needed to reverse FII flows.

Meanwhile, domestic institutional investors (DIIs) remained net buyers across all five trading sessions last week, recording a net inflow of ₹16,950 crore. DII buying has so far cushioned the market from a sharper correction, though benchmark indices still traded with high volatility, swinging between gains and losses amid mixed sectoral cues.

Rupee Pressure: SIPs, Not Just Oil

A separate note from global brokerage Jefferies offered an unconventional reading of the rupee's recent weakness. According to Jefferies, the currency's slide may have less to do with oil prices or the current account deficit and more to do with domestic investors' relentless equity purchases through Systematic Investment Plans (SIPs). Heavy foreign selling combined with strong domestic inflows has, the brokerage argued, emerged as the key structural driver of pressure on the rupee — a dynamic that could persist as long as retail participation in equities remains elevated.

What Markets Are Watching Next

Analysts broadly agree that a stabilisation of the rupee — even a partial one — alongside a sustained earnings recovery could be sufficient to shift FII positioning from net sellers to cautious buyers. The coming quarterly earnings season and any signal from the US Federal Reserve on rate trajectory will be closely tracked as potential turning points for foreign flows into Indian equities.