Indian equity markets experienced significant foreign institutional investor (FII) outflows totaling approximately Rs 2.3 lakh crore in 2026, bringing FII ownership to its lowest since 2009. Despite this, domestic institutional investors (DIIs) and retail contributions provided a strong liquidity cushion, demonstrating the market's resilience. Himanshu Kohli, Co-founder of Client Associates, recently shared his insights on the market correction, FII dynamics, and optimal investment strategies for the current environment.
Understanding FII Outflows and Market Resilience
Kohli explained that FII outflows were driven by several global and domestic factors, including the West Asia conflict, rising crude oil prices, a depreciating Indian rupee (from Rs 85 to Rs 96 per US dollar in FY26), elevated US interest rates, and a strong US dollar. Additionally, a global capital reallocation towards AI and technology-driven opportunities in markets like Taiwan, South Korea, and the US also contributed.
However, Indian markets showcased remarkable resilience due to robust DII flows, strong retail SIP contributions, and insurance inflows. Domestic investors deployed nearly Rs 5.0 lakh crore this year, significantly reducing India's dependence on foreign capital. Kohli noted a positive shift in July and August 2026, with FIIs turning net buyers, investing nearly Rs 20,000 crore and Rs 27,000 crore, respectively. This coincides with improving macro conditions, a more stable rupee, and continued strength in corporate earnings.
Attractive Opportunities After Market Correction
Following the recent market correction, Kohli identifies several sectors offering attractive valuation and earnings prospects:
- Banking & Financial Services: He remains positive on this sector due to improving credit growth, healthy deposit growth, and attractive valuations. The expected easing of pressure on net interest margins (NIMs) as interest rates stabilize and FCNR-related inflows flow through the system further strengthens the outlook.
- Consumer Discretionary: This sector benefits from fiscal support measures, including income tax and GST relief, coupled with resilient consumer demand. The ongoing premiumization trend and improved household spending power are key growth drivers.
- Specialty Chemicals: Kohli is constructive on this segment, which appears to be turning around after a prolonged low-growth phase. It is well-positioned to benefit from recovering demand, new product commercialization, capacity expansions, and global supply chain diversification away from China.
Strategic Asset Allocation in an Uncertain Environment
Kohli emphasizes that asset allocation must be tailored to an individual investor's risk profile, cash flow needs, investment horizon, and financial goals. While remaining constructive on equities due to healthy earnings growth and moderating valuations, he suggests a staggered approach to increasing equity exposure, deploying lump sums during market dips, and maintaining long-term strategic debt allocation.
He also highlighted that many clients are under-allocated to international assets and should align their global allocations with strategic targets, including a mid- to high-single-digit allocation to gold. Global diversification helps mitigate risks from domestic market underperformance, currency depreciation, or concentration in a single economy.
Outlook for Indian Equities (Next 12-18 Months)
Kohli maintains a constructive long-term outlook for Indian equities. Aggregate earnings for the Nifty-500 universe grew 13% YoY in 1QFY27, with small caps leading at 35% YoY growth. He projects robust forward earnings growth for FY27, with Nifty 50 expected to deliver over 15% and mid- and small-cap segments over 20%.
Key drivers for a sustained rally include reasonable valuations, robust credit growth, strong consumption demand, and renewed FII inflows. A resolution to the West Asia conflict could also serve as a positive trigger for risk assets. However, risks remain from elevated crude prices, hawkish central banks, and below-normal monsoons.