FII sentiment shows early signs of turnaround after months of selling: Report

Foreign investor sentiment towards Indian equities is showing early signs of a turnaround after months of sustained selling, with foreign institutional investor (FII) flows returning to positive territory in July following a sharp weakening between March and June 2026, according to Jio BlackRock Asset Management’s August 2026 edition of The Macro Canvas. The shift comes alongside continued buying by domestic mutual funds, which helped cushion the impact of foreign outflows.

FII flows show signs of reversal

The report notes that foreign investor sentiment weakened sharply between March and June, resulting in significant FII outflows. The selling was particularly pronounced in March, when FII outflows reached about $10.4 billion, according to the monthly flow chart. Outflows continued through April and May before intensifying again in June.

However, the report identifies July as an important change in direction, with FII flows returning to positive territory. It says the reduction in outflows in June, followed by the return of FII inflows in July, suggests that the worst of the foreign investor unwind may be behind the market.

“Resilient domestic participation and the return of FII inflows” are identified as early signs of a sentiment turnaround in the report.

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Domestic investors cushion foreign selling

Domestic mutual funds remained consistent buyers even as foreign investors reduced their exposure. Strong and steady domestic mutual fund (DMF) inflows helped absorb part of the foreign selling pressure and provided an important counterbalance during the period of heightened volatility.

The report’s flow data tracks FII and domestic mutual fund flows, including exchange-traded funds but excluding arbitrage flows. It highlights the divergence between foreign and domestic investor behaviour during the recent period, with domestic participation remaining resilient even as overseas investors turned cautious.

This domestic support is significant because it has limited the impact of foreign selling on overall market liquidity and sentiment, even as external investors reduced allocations to Indian equities.

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Positioning points to contrarian setup

The potential improvement in flows comes against a backdrop of historically weak foreign investor positioning. The report says India-dedicated flows as a percentage of India’s free-float market capitalisation are approaching levels previously associated with market recoveries.

The rolling one-year India-dedicated flow cycle is close to lows last seen around the Covid collapse in December 2020 and the trough of the Nano-Bon rally. Previous troughs were followed by meaningful rebounds in both foreign flows and markets.

The report, therefore, argues that a substantial portion of the negative sentiment may already be reflected in investor positioning. With foreign flows beginning to recover and domestic investors continuing to provide support, the latest data points to the early stages of a potential sentiment reversal rather than a continuation of the earlier foreign selling cycle.