The ceasefire in West Asia may have cooled oil prices and stabilised the rupee, but foreign institutional investors, who have been on a selling spree in the Indian stock market, may not reverse course right away, feel market experts at Ambit Institutional Equities.

Till June 24 this calendar year, foreign portfolio investors offloaded $29.8 billion from India’s equity market, significantly more than the $18.9 billion that they sold in the whole of 2025, according to data from NSDL.

“I will not be too much enthusiastic on FII flows. Maybe, the worst spell of selling is over, but I don’t think they will come back in great numbers,” said Bharat Arora, director, strategy, Ambit Institutional Equities.

Several factors led to the huge selling by FIIs. In 2025, there was uncertainty around the import tariff imposed by the US administration, then the US war on Iran this year added to geopolitical tensions, and worries rose on how it would impact economies like India, which are heavily dependent on imports for oil and gas.

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Besides, over the past 12 months, a lot of money has chased AI (artificial intelligence) and related investment opportunities, in markets from South Korea, Taiwan to the US. India missed out on this gold rush as there is hardly any listed opportunity here so far. But there is also another fundamental reason why FIIs may still not be excited about India: Valuations.

“Even at this moment, the risk-reward proposition is quite unattractive. If you look at major emerging markets, your indices are trading at 20 times on trailing basis, the multiples are not that cheap, especially if growth slowdown happens. So, there is a reason why these outflows are happening,” said Arora.

The valuations also look more unattractive as corporate earnings have been lacklustre and there is a further downside risk to earnings should the economy slow down. Ambit Institutional Equities sees downside risk to consensus forecast of 15% earnings per share growth in the FY27.

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Despite the sharp FII selloff, year-to-date the NSE Nifty 50 index has declined only 7.50% in 2026. This is still a sharp contrast to many other major markets. The benchmark S&P 500 index in the US is up over 7%, the Taiwan Weighted Index has surged more than 57% and South Korea’s Kospi index has more than doubled in the same period.

Arora noted that the market had only sustained so far because of the domestic money supply, which was acting as an anchor. There have been strong inflows from domestic institutions, especially mutual funds. According to Association of Mutual Funds of India data, even in May, when inflows into equity MFs declined 40% over April, SIP (systematic investment plan) flows remained strong at Rs 30,954 crore.

Nitin Bhasin, head of institutional equities at Ambit Capital, says India is no more a frontier market, but a discovered market. So, compared with 20% returns that markets delivered in the 1990s or 15-16% odd in the 2000s, in the last five years, markets gave only 8.1% compound annual returns in rupee terms, and less than 5% in US dollar terms, he noted.

Ambit notes that despite lower global GDP dependence, India’s rising investments and trade make external shocks a permanent structural risk.

The impact of the West Asia war is expected to drive the Indian economy into a slowdown in the first quarter of FY27. Further, the El Niño could hit household sentiments and weigh on discretionary consumption, while premiumisation may sustain, it said. Domestic uncertainty and external shocks are also keeping private investments on the sidelines, it added.

Therefore, despite going through a time and price correction, since around October 2024, there may be some more correction left, feels Bhasin.

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“The problem is that relatively, the narratives of the world outside are seemingly more tempting right now for the capital to be missing out on that,” he pointed.

In the period of extreme uncertainty, heavyweights could provide relative safety in the market, according to Ambit Institutional Equities. It expects large-caps to remain relatively flat over the next 12 months, small and midcaps are likely to underperform.

The overall worries of how AI could disrupt once favoured sectors like Indian IT, and at the same time faster growing segments available at similar valuations, is preventing FII interest too.

“In earlier tech transitions, the proportions of the work IT companies did that was at risk was small. But now what is coming under risk is their bread and butter, which are applications, BPO, testing, software implementations, systems integration, systems integration etc. So, a 15-20 % revenue deflation can happen over 3-4 years,” said Ashwin Mehta, head of equity research, technology, internet and new age companies, Ambit Institutional Equities.

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Despite stabilising in recent weeks, the rupee is also likely to remain under pressure, and that will also weigh on FII sentiments, as a depreciation in rupee impacts their returns and US dollar earnings.

The measures announced by the RBI and the government in terms of trying to attract capital could provide some near-term support, according to an Ambit economist. But, until the outflows seen on the FDI front, especially repatriation, and Indian companies investing abroad, reverse, or gross FDI flows really pick up, the pressure on the rupee would remain, the economist added.

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