Foreign Institutional Investors (FIIs) are key pillars of Indian capital markets, influencing market sentiment, liquidity, and direction with their outflows and inflows. Their buying and selling decisions are influenced by macroeconomic and microeconomic factors. In this blog, we will explore how micro and macroeconomic factors influence FII activity in India.
Macro Economic Factors Shaping FII Flows
As of the market today, FIIs have withdrawn approximately ₹1.42 trillion (₹1,42,000 crore) from Indian equities year-to-date. Some macroeconomic factors influencing FII flows in the Indian stock market are:
Global Interest Rates and Dollar Strength
Weaker US dollar and falling US interest rates shift FII inflows into India. FIIs invest in emerging markets to gain attractive returns on their investments. On the other hand, when the Federal Reserve increases interest rates or the US dollar improves, FIIs withdraw their investments from India and invest in other emerging markets, in search of safety or higher risk-free returns abroad.
Rupee Stability and Currency Trends
One of the main factors affecting FII inflows into India is the value of the Indian rupee relative to the US dollar. FII interest is driven by a stable or strengthening rupee because it preserves or increases returns on capital repatriation. To prevent currency losses during a significant rupee depreciation, FIIs withdraw their investments.
Geopolitical and Global Growth Factors
FII data also depend on global events like wars, trade wars, slowdowns in global growth, and commodity price fluctuations. FIIs increased their exposure to India as a “safer” emerging economy when China was hit with real estate sector instability and the US imposed fresh trade tariffs.
Valuation and Corporate Earnings Outlook
High valuations deter FII inflows, whereas corrections attract them to the Indian market. Low corporate profits can keep FIIs on the sidelines, whereas a sharp upswing can quickly bring them back. Improved forecasts by top Indian blue-chip companies revived foreign investor interest in India.
Microeconomic Factors Influencing FII Trends
Some microeconomic factors affecting FII flows in the Indian share market are:
Sector-Specific Fundamentals and Policy Support
FIIs are agile, constantly rotating between sectors based on comparative global growth, domestic reforms, and margins. For example, in the first half of 2025, FIIs invested heavily in financial services, capital goods, telecom, and defense sectors, boosted by government support and structural reforms. Conversely, FIIs outflow from IT and oil & gas due to US recession concerns and volatility in global energy prices.
Company Performance and Governance
FIIs scrutinize companies for their earnings consistency, management quality, transparency, and standards of governance. Stable, growing companies with global reach, especially banks and capital goods firms, draw strong FII inflows. Any instances of poor corporate governance or disappointments in earnings often lead to rapid FIIs outflows.
Relative Valuation within Sectors
Undervalued stocks in outperforming segments attract FIIs’ attention. A sector experiencing a policy boost (e.g., defense production due to the Make-in-India initiative) but with laggard stocks often attracts FII attention, as seen by recent foreign bids for key defense and capital goods stocks in 2025.
Market Position and Liquidity at Stock Level
FIIs prefer companies with high liquidity and trading volumes, like blue-chip companies or sector leaders, because large investments in these big companies can be made or withdrawn without impacting prices significantly. Illiquid or small-cap stocks do not offer this feature to FIIs, and as a result, they do not get as much FII interest.
Conclusion
FII inflows are an indicator of India’s position in the world and market momentum, but they are shaped by a complex mixture of global macro and granular microeconomic factors. Savvy investors can gain an edge by understanding this interplay and capitalising on it. By anticipating how broad trends and sector specifics drive FII data, investors can make informed, agile decisions in today’s fluid economic landscape.
