When Will FIIs Return?

Every one is asking When Will the Stock Market Rebound? The Simple Answer is once Foreign Investors start buying market will go up

The billion-dollar question

Foreign Institutional Investors (FIIs) have been selling more than buying, triggering a sharp market correction. The Indian stock market has dropped over 15% in the last five months, with FIIs offloading ₹1.5 lakh crore worth of shares this year alone. Domestic Institutional Investors (DIIs), primarily mutual funds, are absorbing the sell-off, but they haven’t been able to lift the market.

Why FIIs Matter?

FIIs have historically dictated market movements. When they invest, markets go up; when they sell, markets fall. They still hold the largest share in Indian equities—about 17%, roughly equal to DIIs. However, DIIs are catching up. In the last six months, FIIs have sold shares worth ₹3.23 lakh crore, while DIIs have purchased ₹3.37 lakh crore, driven by steady inflows from Systematic Investment Plans (SIPs). If SIP flows slow down, markets could face further pressure

Abolish Capital Gains Tax?

To attract FIIs back, some experts argue for removing capital gains tax. FIIs don’t pay this tax in most other countries, so why should India impose it? In a viral video by Helios Capital founder Samir Arora claims that while the government earned ₹82,000 crore from capital gains tax in 2023, FII selling has wiped out over ₹1 lakh crore in market value.

Here’s how taxation impacts FIIs:

• If an FII invests ₹100 and earns ₹10 in profits, long-term capital gains tax deducts ₹1.25, while short-term tax takes ₹2.

• The government is unlikely to remove this tax immediately, especially after already reducing income tax, leading to an estimated ₹1 lakh crore revenue loss.

So, When Will FIIs Return?

FIIs will come back when the factors driving their sell-off change. Three key reasons behind the outflows:

1. Weak Economic Growth – India’s GDP growth is expected at 6.3% next year, which could boost corporate earnings.

2. Expensive Valuations – Falling corporate profits have made stocks expensive. Markets can become attractive if prices drop another 10-15% or earnings rise.

3. Rupee Depreciation – The rupee has weakened by 3% over the last year. When FIIs exit, they receive rupees and convert them into dollars at a higher cost, reducing their returns.

Trump Card

• Uncertainty around U.S. policies under President Trump keeps global markets volatile. Investors prefer the safety of U.S. bonds, offering 4-5% returns.

• China’s stock market looks cheap, drawing FII interest away from India.

The Bottom Line

Experts believe FIIs will return, but it may take 3-6 months. Until then, domestic investors will have to hold the fort.

This Newsletter is English Version of My Hindi Newsletter Hisab Kitab published on Linkedin Every Sunday Morning at 10 am. Video Version of the newsletter in Hindi is published on Biz Tak