Foreign institutional investors are cautiously returning to Indian equities, but the latest buying wave is not yet strong enough to be called a durable reallocation, according to Venugopal Manghat, chief investment officer–equity at HSBC Mutual Fund. As per The Economic Times, Manghat highlighted that FPI behaviour may continue to be influenced by global liquidity, interest-rate expectations, currency stability and India's relative valuation versus other emerging markets. While India's valuation premium has moderated meaningfully from the peaks of 2024, investors need to see stronger earnings growth and a reasonably stable rupee before treating the revival in foreign inflows as structural. The current trend is described as constructive but requires more evidence before calling it a durable structural shift.
Foreign institutional investor (FII) inflows returned to India in July 2026 after months of heavy outflows, according to Jio BlackRock Asset Management's August macroeconomic outlook. However, the most striking development has been the emergence of India's domestic institutional investors as a powerful counterweight to foreign selling. Between March and June 2026, when FIIs sold approximately ₹2.61 lakh crore worth of Indian equities, mutual funds bought around ₹2.43 lakh crore, representing 93% of FII equity selling. This pattern was most visible in March 2026, when FIIs sold around ₹1.18 lakh crore while mutual funds bought nearly ₹98,746 crore, even as the Nifty 50 still fell 11.3% during that month. The data shows that domestic buying clearly did not protect every blue-chip stock from falling, but it provided significant support during periods of foreign selling pressure.
The earnings cycle has clearly improved with Nifty profit growth accelerating and FY27–28 earnings expected to grow in the mid-teens, according to HSBC's analysis. As reported by The Economic Times, Q1 FY27 earnings growth came at a 10-quarter high with marginal upgrades for the year, indicating that the earnings environment is stabilising. The improvement is supported by better domestic demand, resilient margins and a gradual revival in the investment cycle. FY27 PAT growth is estimated at around 16% for Nifty 100, 20% for mid-caps and 34% for small-caps, with healthy growth expected into FY28. However, Manghat emphasized that greater breadth and consistency over the next few quarters will be important to establish that this is a sustained earnings recovery rather than a one-quarter improvement.
The domestic shock absorber was built on a foundation of steady SIP contributions that increased from ₹18,838 crore in January 2024 to ₹31,961 crore by July 2026, representing a nearly 70% increase. Between October 2024 and July 2026 alone, investors contributed approximately ₹6.31 lakh crore through SIPs, with monthly contributions averaging ₹28,674 crore. The NSE's registered investor base expanded from around 4 crore in March 2021 to 10 crore by August 2024, while around 7.53 crore SIP folios had instalments of ₹3,000 or less in FY26, demonstrating that India's SIP strength came from crores of relatively small investments being repeated month after month. This automated investing structure helped keep domestic inflows steady even during sharp market corrections, with SIP contributions remaining strong at ₹32,087 crore in March 2026 despite the Nifty 50 falling 11.3%.
Beyond near-term market movements, Jio BlackRock highlighted India's longer-term manufacturing opportunity, citing Morgan Stanley projections. According to the report, manufacturing gross value added could rise from USD 519 billion in 2025 to USD 1.5 trillion by 2035 in the base case scenario, while the bull case could take it to USD 2.05 trillion. The investment cycle remains one of the more important medium-term opportunities for India, supported by government infrastructure spending, manufacturing initiatives and improving private-sector participation. Capacity utilisation remains healthy and points towards improving conditions for private capex, with the broader earnings recovery potentially reinforcing the investment cycle. However, HSBC cautioned that good structural themes can become poor investments when valuations run significantly ahead of earnings, emphasizing the need to watch earnings delivery versus expectations, order-book growth translating into cash flow, and return ratios and valuations closely.
Despite positive signals from domestic absorption capacity, the report flagged several risks to the outlook. India's urban and rural consumer confidence has fallen to its lowest level since September 2023, which could weigh on discretionary consumption and corporate earnings, as reported by Jio BlackRock. The report also noted that the Nasdaq-100's underperformance against the S&P 500 in July was its widest monthly gap since the dotcom bubble, highlighting risks from concentration in mega-cap technology stocks. However, the data shows that cash held by equity mutual funds stood at around ₹1.78 lakh crore by February 2026, roughly 24% lower than April 2025, suggesting that domestic institutions had used significant amounts of available cash while repeatedly buying into foreign selling. This indicates that while India's stock market now has a much stronger domestic source of capital than before, foreign selling is increasingly being met by domestic money on the other side, making the market less dependent on foreign flows than previously, though it does not make Indian equities immune to global shocks.
