Rupee Stabilization May Slow FII Outflows, DIIs Cushion ₹33K Crore

Pradeep Gupta, Chairman & MD of Anand Rathi Share and Stock Brokers Limited, believes the current FII selling is more a stampede towards AI opportunities than an exodus from India. In an interview with Mint, Gupta explained that "the word 'permanent' is doing too much work here. What we are witnessing looks less like an exodus from India and more like a stampede towards AI." He noted that foreign investors are chasing the one trade that has consistently worked over the past year: direct exposure to the AI investment cycle, with Taiwan and South Korea owning the picks and shovels of that boom. Taiwan has TSMC, which fabricates most of the world's leading-edge AI chips, while South Korea has Samsung Electronics and SK Hynix, whose memory chips sit at the heart of AI infrastructure. India simply does not have a listed company that offers comparable exposure, as global fund managers can find numerous AI-linked options in Taipei or Seoul but very few in Mumbai. Gupta emphasized that "capital has no nationality. It goes where it is welcomed. It stays where it is rewarded. And it leaves when better opportunities emerge elsewhere."

Reserve Bank of India announced significant investment limits for Foreign Portfolio Investors (FPIs) in government securities and state development loans for fiscal year 2027, providing overseas investors with a larger investment window in India's debt market. According to the central bank's notification, FPIs will be permitted to invest up to ₹4.62 trillion in Government Securities (G-Secs) during the first half of FY27, covering the April-September 2026 period. For State Development Loans, which are bonds issued by state governments, the investment limit for foreign investors has been fixed at ₹1.53 trillion for the same period. The RBI has also outlined higher limits for the second half of the financial year, with the FPI investment cap in government securities increased to ₹4.77 trillion for the October 2026-March 2027 period. This announcement comes as FIIs have net sold equities worth ₹2.68 lakh crore in 2026 so far, with March posting the highest ever selling at ₹1.18 lakh crore.

Foreign institutional investors are shifting capital from India to North Asian markets like South Korea and Taiwan, driven by the AI investment boom and extraordinary earnings growth. According to Jonathan Garner of Morgan Stanley, speaking to ET Now, the primary driver of international capital flows today is earnings growth, and North Asia is currently delivering spectacular numbers that are difficult for global investors to ignore. Garner explained that "the most important driver of foreign flows is what's going on on the earnings side. And here the performance of India is perfectly reasonable. We are anticipating something like 15% earnings growth on a go-forward basis. The issue is that in North Asian markets—in Japan, Korea, and Taiwan—we are getting really spectacular earnings growth." This trend is not unique to India, with investors also reducing exposure to markets such as Indonesia, Southeast Asia, and even Australia as they rotate capital toward economies more directly linked to the AI-driven investment wave. As per ET Now, the ongoing AI capex boom, alongside rising investments in energy and defence, is disproportionately benefiting North Asian economies, with these markets heavily skewed toward semiconductors and AI-linked industries becoming the primary beneficiaries of global portfolio reallocation.

India is currently sidelined from the global AI investment boom due to its lack of semiconductor manufacturing, according to market veteran Punita Kumar Sinha from Pacific Paradigm Advisors. Speaking to ET Now, Sinha noted that "while India's technology sector has already undergone a significant correction, much of the pessimism surrounding the industry may already be reflected in stock prices." She explained that "the Indian IT services companies have already hurt enough. The valuations are discounting a large amount of these concerns, but the confidence has not yet come back into the sector because there is a lot of confusion on what it means for the sector." While uncertainty remains over the long-term impact of AI on IT services, Sinha believes investors should not completely ignore the sector at current levels, as conversations with company managements suggest that the operational impact of AI has not been as severe as market fears imply. She noted that "there is definitely now value emerging in the sector and if you speak to the companies themselves, they are not really seeing the negative impact as much as it has been made out to be."

Despite record FII outflows of approximately ₹2.2 lakh crore in 2026, the Nifty has corrected only around 10-11%, marking what experts describe as the most important structural development in Indian equities over the past decade. As per Pradeep Gupta of Anand Rathi, "Something fundamental has changed. Domestic institutions have absorbed most of the selling pressure. Monthly SIP inflows now consistently exceed ₹30,000 crore. Unlike previous cycles, domestic investors have continued to invest through periods of market weakness rather than retreating from them." Global investors reduced their equity stake in India's financial services sector in the latter half of May, selling shares worth ₹5,181 crore compared to the first half's outflow of ₹17,000 crore, according to data from National Securities Depository Ltd. Overseas investors sold shares worth ₹14,621 crore across 13 sectors in the second half of May, after withdrawing ₹38,443 crore across 19 sectors in the first half. FPIs have continued the selling spree in the current calendar year, offloading equities worth ₹2.6 lakh crore up till June 03, which exceeds their outflow of ₹1.7 lakh crore in the whole of 2025. Cumulatively, DIIs invested net ₹33,932.95 crore during the period, more than compensating for FII outflows and underscoring the growing role of domestic investors in stabilizing Indian equity markets.

Ambit's Dhiraj Agarwal highlighted concerns around the RBI's revised macroeconomic projections, noting that the central bank lowered its gross domestic product (GDP) growth forecast while raising its inflation outlook, alongside warnings about higher crude oil prices and downside risks to growth. Speaking to CNBC TV18, Agarwal stated that "the medium-term picture is still not very rosy, so we need to be a little cautious." He does not share the market's bullish view on financial stocks, arguing that banks and financial institutions are closely tied to the broader economy and could face pressure if growth slows and inflation remains elevated. Agarwal added that expectations of earlier rate hikes could also create challenges for the sector over the next 12 months, even if short-term gains remain possible following the policy announcement. Foreign investors are likely to return only when corporate earnings growth improves or when global enthusiasm around artificial intelligence-driven investments begins to moderate, according to Agarwal's analysis. He expects the pace of foreign selling to slow if the rupee remains stable or appreciates further, which would itself be a positive development for markets, but he does not see a strong case yet for a significant revival in FII inflows.