Can the India-US trade breakthrough bring FIIs back to Indian equities

Indian markets have cheered the end of the impasse over the US–India bilateral trade agreement, with some analysts hoping that the breakthrough could encourage foreign investors to return to Indian equities.

For much of the past year, foreign institutional investors (FIIs) have remained on the sidelines, weighed down by geopolitical uncertainty, trade frictions, and slowing corporate earnings.

The recent progress in trade negotiations has offered a rare moment of clarity, prompting hopes that global capital flows may gradually turn in India’s favour.

“If you set aside the nitty-gritties of the trade deal and the formal agreement, which is yet to be signed, the development is by and large a booster for market sentiment,” Kranthi Bathini, director of equity strategy at WealthMills Securities, told Invezz.

“The US-based FPIs especially have been on the sidelines due to the friction in US-India relations in the last six months, therefore the current trade deal sends across a positive sentiment to investors across the globe,” Bathini added.

Foreign investors retreat amid trade tensions while DIIs keep Indian equities afloat

Foreign investors have been persistent sellers of Indian equities since mid-2025, with only brief interruptions in October and November.

Data from the National Securities Depository Limited (NSDL) shows that FIIs have withdrawn ₹106,606 crore net from equities since early August 2025, when the United States imposed additional tariffs on Indian goods, raising the effective rate to around 50%.

However, the pace of selling showed signs of easing in early February, with FIIs turning net buyers to the tune of ₹1,906 crore over the first two trading sessions.

While foreign investors retreated, domestic institutional investors (DIIs) played a stabilising role in the market.

Throughout 2025, DIIs emerged as consistent buyers, cushioning the impact of foreign outflows and preventing deeper market corrections.

In January 2026 alone, domestic institutions purchased Indian equities worth ₹67,183.01 crore, underscoring the growing importance of local capital in sustaining market momentum.

According to a report by Motilal Oswal Financial Services, DII equity inflows reached a record $90.1 billion in 2025, compared with $62.9 billion in the previous year.

Over the past decade, DIIs have invested $255.8 billion cumulatively in Indian equities, highlighting a structural shift in the market’s investor base.

Analysts say that without these domestic inflows, Indian equities would have faced significantly sharper declines amid the wave of foreign selling.

Why the trade deal could act as a sentiment catalyst for FIIs

Market participants broadly agree that the easing of trade tensions has improved the narrative around Indian equities.

Motilal Oswal Financial Services noted that strained trade relations since April 2024 had weakened foreign investors’ outlook on India, contributing to the market’s underperformance relative to peers.

Over the past year, India has lagged other emerging markets by around 40%, reflecting both external pressures and domestic headwinds.

Now, improving geopolitical signals could trigger a sharp shift in foreign flows.

“A large chunk of US FII capital will likely shift here, viewing India as the premier strategic play among emerging markets. The current high pessimism? It’ll get trapped in a sharp rally fueled by short covering. DIIs and retail will pile in, amplifying flows from all sides—get ready for the upside!” said Divam Sharma, Co-Founder and Fund Manager at Green Portfolio PMS.

Seema Srivastava, senior equity research analyst at SMC Global Securities, said the agreement signals policy stability, growth revival, and improved sectoral prospects, which together strengthen investor confidence.

“Overall, the deal reduces geopolitical and trade risks, a key determinant in FPI allocation decisions. While execution risks and global demand conditions remain important variables, the agreement is widely seen as a structural positive that will re-anchor FPIs to India’s growth story,” Srivastava said.

Bathini added that Indian markets had entered an oversold zone after months of weak performance and that the trade breakthrough arrived at a critical moment.

Going forward, investors are likely to focus on domestic growth trends, monetary policy signals from the Reserve Bank of India, and the durability of the trade agreement, he said.

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