Foreign investors are pouring money back into Indian equities, but the Nifty and Sensex are refusing to join the rally. FII inflows crossed $3.2 billion in August, the highest monthly level since September 2024, even as both benchmark indices fell more than 1% during the month.
The divergence has left investors searching for an explanation. Historically, a shift in FII sentiment has triggered a sharp rally in largecaps and lifted the Nifty and Sensex. This time, however, small- and midcap stocks are closer to their record highs while the Nifty remains about 8.2% below its all-time high touched in early January 2026.
“The well-entrenched pattern seems to have broken,” said N. ArunaGiri, Founder and CEO of TrustLine Holdings.
The headline FII number, he said, does not tell the full story. The composition of the flows is proving more important than the total amount.
FII flows turned positive in July for the first time in several months, with net inflows exceeding $2 billion. But only around $700 million came through the secondary market. More than $1.4 billion entered through the primary market, largely via qualified institutional placements, preferential allotments and initial public offerings.
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The trend continued in August. More than $1.2 billion came through the primary market, while around $1.9 billion came through exchanges. That means actual FII buying through the secondary market over the past two months was only about $2.68 billion.
“Primary market money does not necessarily create a broad-based bid for existing listed stocks,” ArunaGiri said. Such capital is absorbed by companies, promoters and private-equity exits, rather than creating demand across the broader universe of already-listed shares.
Even that, however, does not fully explain the weakness in the Nifty and Sensex. ArunaGiri said FIIs appear to be selectively buying large mid-cap stocks despite elevated valuations, while largely bypassing attractively valued large Financials and IT stocks. Together, the two sectors account for more than 44% of the Nifty.
This selective allocation is limiting the impact of the FII inflow on the benchmark indices. While large mid-caps are receiving a direct boost from foreign buying, small-caps are benefiting mainly from the positive sentiment surrounding the changing nature of FII flows.
“It remains party time for small- and mid-caps—though, importantly, on a stock-specific basis and not universally across the board,” ArunaGiri said.
The data from Axis Securities presents a more cautious picture. Foreign investors remain sensitive to oil prices, geopolitical developments and global risk appetite, with net flows continuing to fluctuate significantly. While FII selling is no longer accelerating, the brokerage said a sustained reversal into meaningful net buying is still needed for the Nifty to reclaim its previous highs.
Total FII outflows in fiscal 2027 so far have reached nearly $8 billion, according to Axis Securities. Domestic institutional investors, by contrast, have infused $34 billion into equities through mutual fund inflows and systematic investment plans, helping offset foreign selling.
The weakness in August was concentrated at the large-cap index level rather than reflecting a broad-based risk-off move, according to Mayur Patel, President and Fund Manager, Listed Equity, 360 ONE Asset. The Sensex declined 1.5%, while the BSE 500 was marginally lower.
Patel said foreign investors remained net buyers during the month, while the broader market and primary market retained positive momentum. 21 mainboard IPOs raised about ₹21,000 crore in August.
He attributed the weakness in large-caps to external macroeconomic and technical factors, including renewed West Asia tensions that pushed Brent crude towards $90 a barrel and continuing uncertainty over the US Federal Reserve’s interest-rate path.
“Over the medium term, however, I remain quite bullish,” Patel said.
He pointed to June-quarter BSE 500 profit growth of around 20% and real GDP growth of 7.8% as signs of resilience in the earnings and macroeconomic environment. Patel also expects FCNR(B) inflows to support credit growth and domestic liquidity, while a recovery in consumer discretionary demand and private capital expenditure could provide additional support.
The key risks are a potentially hawkish US Federal Reserve and any corresponding tightening bias from the Reserve Bank of India, he said.
Patel remains positive on industrials, supported by investments in power transmission and distribution, renewable-energy equipment, electronics, defence and data centres. Private banks, NBFCs, consumer discretionary and telecom are also among his preferred areas, although he stressed that stock selection remains critical at current valuations.
Chandraprakash Padiyar, Senior Fund Manager at Tata Asset Management, also said the earnings backdrop remains resilient, particularly across the mid- and small-cap segments.
“The Q1FY27 earnings season has reinforced confidence in the resilience of India Inc., with earnings growth remaining broad-based and particularly encouraging across the mid- and small-cap segments,” Padiyar said.
He added that corporate commentary has become increasingly optimistic, while energy prices, inflation trends and festive-season demand will be key factors for market sentiment.
“Stock selection will matter more than sector calls,” Padiyar said, citing divergence in earnings across companies. He recommended diversified strategies such as Flexi Cap, Multi Cap, Large & Mid Cap and Focused funds, along with selective allocations to Banking and Small Cap funds.
For a meaningful large-cap rally to take shape, the market may need a broader and stronger revival in secondary-market FII buying, particularly in index heavyweights. Until that happens, the latest inflow numbers may continue to look impressive on the surface while having a limited impact on the Nifty.
