Will FIIs Make a Comeback to India by 2026?
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Synopsis
A new report suggests that foreign institutional investors (FIIs) are likely to return to India in 2026, driven by stronger earnings growth and a potential trade deal with the U.S. Key sectors such as banking and consumer discretionary are expected to outperform, making this an exciting forecast for Indian equities.
Key Takeaways
- FIIs are expected to return to India in 2026.
- Strong earnings growth anticipated in FY27.
- Banks and NBFCs are positioned for improved performance.
- Consumer discretionary sectors are benefiting from changing consumer behavior.
- Government initiatives are boosting disposable incomes.
New Delhi, Dec 24 (NationPress) A report released on Wednesday indicates that foreign institutional investors (FIIs) are anticipated to re-enter India by 2026, spurred by enhanced earnings growth predicted for FY27 and the possibility of a trade agreement with the United States.
Our outlook on the equity markets for 2026 remains positive. The Nifty's valuations, currently at 20.5 times the 1-year forward Price-Earnings (PE) ratio, align with its 5-year average and present only a modest premium over the 10-year average, according to analysis from HSBC Mutual Fund.
HSBC's report suggests a favorable stance towards banks and non-banking financial companies (NBFCs), projecting that net interest margins for banks will see improvement in FY27. The asset quality of private banks is expected to recover, driving mid-teens earnings growth for FY27 following a sluggish FY26.
Moreover, NBFCs are achieving robust earnings growth, driven by strong credit demand and improving margins resulting from declining interest rates.
The report also highlights an optimistic view on the consumer discretionary sector, where segments like internet platforms are benefiting from a marked shift in consumer behavior towards quick commerce and e-commerce. Additionally, sectors such as jewellery, automobiles, and travel are likely to gain from recent government initiatives designed to enhance disposable incomes.
Furthermore, the electronic manufacturing services sector is noted as a structural theme, with a strong governmental push aimed at establishing an electronics manufacturing value chain in India. HSBC has taken a neutral position on IT and industrial sectors, predicting that FY27 IT earnings may approach double digits, bolstered by the adoption of Generative AI.
On the other hand, HSBC maintains an underweight position on metals, stating that the potential for aluminium and steel price increases has largely been factored into current valuations.
The report also pointed out a divergence in performance for 2025, with the Nifty Total Return Index increasing by 12 percent up to November, while the NSE Midcap and BSE Smallcap indices have seen gains of 6.5 percent and losses of 5 percent, respectively.
Despite 2025 showing lackluster earnings growth for the Nifty and subdued equity market performance, several positive economic indicators could bolster market performance in 2026, the report concluded.
Point of View
It is crucial to recognize the optimistic outlook for the Indian equity markets. The expected return of foreign institutional investors in 2026 underscores the resilience of the Indian economy and the potential for significant growth across various sectors. Our analysis points to the transformative impact of government initiatives and evolving consumer behavior, positioning India favorably in the global market.
NationPress
24/12/2025
Frequently Asked Questions
What factors are driving FIIs back to India?
The anticipated return of foreign institutional investors (FIIs) to India is primarily driven by projected earnings growth in FY27 and the possibility of a trade agreement with the United States.
Which sectors are expected to outperform in 2026?
The banking sector and consumer discretionary segments, including e-commerce and quick commerce, are expected to outperform in 2026.
How does the Nifty valuation compare historically?
The current Nifty valuation of 20.5 times the 1-year forward Price-Earnings (PE) ratio is in line with its 5-year average and shows a modest premium over the 10-year average.
