Foreign Institutional Investor (FII) sentiment towards Indian equities has shown early signs of a significant turnaround, with flows turning positive in July 2026 after a prolonged period of selling. This shift is detailed in the August 2026 edition of "The Macro Canvas" report by Jio BlackRock Asset Management, which also notes the consistent support provided by domestic mutual funds.
A Shift After Sustained Outflows
The period between March and June 2026 saw a sharp weakening of foreign investor sentiment, leading to substantial FII outflows from Indian markets. March 2026 alone recorded approximately $10.4 billion in FII outflows, with selling continuing through April and May, and intensifying again in June.
However, the Jio BlackRock report identifies July as a crucial turning point, as FII flows returned to positive territory. The reduction in outflows observed in June, followed by the subsequent inflows in July, suggests that the most intense phase of foreign investor unwinding might now be behind the market.
Domestic Resilience Provides Cushion
Throughout the period of foreign selling, domestic mutual funds (DMFs) remained consistent buyers. These strong and steady domestic inflows played a vital role in absorbing a significant portion of the foreign selling pressure. This resilient domestic participation provided an essential counterbalance during a time of heightened market volatility.
The report highlights a clear divergence in investor behavior, with domestic investors maintaining their allocations and even increasing exposure, while overseas investors adopted a more cautious stance. This robust domestic support helped limit the overall impact of foreign selling on market liquidity and sentiment, even as external investors reduced their positions in Indian equities.
Positioning Hints at Potential Rebound
The potential improvement in FII flows occurs against a backdrop of historically weak foreign investor positioning. According to the report, India-dedicated flows, when measured as a percentage of India’s free-float market capitalization, are nearing levels previously associated with significant market recoveries.
The rolling one-year India-dedicated flow cycle is currently close to lows last observed during major market events such as the Covid collapse in December 2020 and the trough of the Nano-Bon rally. Historically, such troughs have been followed by meaningful rebounds in both foreign flows and the broader markets. This suggests that a substantial portion of the negative sentiment may already be factored into investor positioning, pointing towards the early stages of a potential sentiment reversal rather than a continuation of the earlier selling cycle.