Foreign investor positioning in Indian equities is nearing historical extremes, with FII flows showing early recovery after sustained outflows. According to Jio BlackRock Asset Management's The Macro Canvas – August 2026, foreign investor sentiment weakened sharply between March and June 2026, resulting in significant FII outflows. The rolling one-year India-dedicated flow cycle is close to its lows, a level last seen during the Covid collapse in December 2020 and the Nano-Bon rally trough. At current levels, the ratio is pricing in significant pessimism, well beyond what fundamentals alone justify.
Foreign investor sentiment weakness was offset by strong and consistent domestic mutual fund (DMF) inflows that helped cushion market volatility and provided an important counterbalance to foreign selling. As reported by Jio BlackRock, the reduction in outflows in June and the subsequent return of FII inflows in July suggest that the worst of the foreign investor unwind may be behind us. The report emphasizes that resilient domestic participation and the return of FII inflows signaling early signs of a sentiment turnaround. Recent market data shows that domestic institutional investors continue to demonstrate strong confidence in Indian markets, providing crucial support during periods of foreign selling pressure.
India's valuation premium has also moderated, with the country's equity valuations moving closer to historical averages. According to Jio BlackRock, India's 12-month forward P/E has reverted to its 10-year average of around 20x, after trading at a sustained premium. Additionally, India's P/E relative to the MSCI Emerging Markets index has pulled back to its long-run average of around 1.4x, eliminating a key deterrent for global allocators. The report notes that valuation is no longer the enemy, with the entry point today looking far more attractive than it was 12-18 months ago.
Jio BlackRock's analysis suggests that a substantial unwinding of foreign investor allocations has already played out over the past year, suggesting that a large part of the negative sentiment may already be reflected in positioning. The report emphasizes that flows are a lagging, not leading, indicator, stating that when they bottom, markets have already started to recover. The contrarian setup is building, with the combination of resilient domestic buying, reduced foreign selling, and more reasonable valuations potentially signaling a potential sentiment turnaround for Indian markets. Recent market performance supports this view, with domestic institutional investors maintaining their positive stance even as foreign flows remain subdued.
