After foreign institutional investor (FII) outflows worth nearly Rs 2 lakh crore year-to-date, equities are showing early signs of recovery, according to Elara Capital. The brokerage attributes this turnaround to India’s resilient macroeconomic backdrop within emerging markets (EMs), alongside moderating valuations and stabilizing earnings revisions.“With valuation premiums cooling and earnings outlook steadying, conditions now favor a gradual FII reallocation and sustained domestic leadership,” Elara said in its recent note. The firm highlighted four key reasons supporting the potential FII reversal, as cited by Economic Times.
Reason 1: India’s ownership in EM portfolios
Despite its growing weight in EM indices, India remains under-represented in global investor allocations. India’s share in EM benchmarks has climbed to around 18 per cent from 6 per cent in January 2009 but still trails the 22 per cent peak seen in August 2024.Post-Covid, global funds shifted exposure towards North Asian markets, lured by technology-led earnings growth. Elara expects this under-ownership gap to narrow as India’s earnings stabilize and growth momentum strengthens relative to peers.
Reason 2: Earnings outlook firm
India’s valuation premium over other EMs has moderated sharply in the past two years. MSCI India’s trailing 12-month P/E stands at about 25.1x, compared to MSCI EM’s 16.4x and China’s 15.6x — premiums of 53 per cent and 61 per cent, respectively.Although still elevated, two-year forward valuations have cooled from their peaks, supported by superior fundamentals. India’s return on equity (ROE) remains robust at 15 per cent, far above China’s 10 per cent. “With valuation extremes now behind us, the market’s next phase will hinge on earnings revisions,” the report noted.
Reason 3: Mid-caps offer opportunity
Current FII ownership in Indian equities is well below historical averages. FII holdings in the Nifty 50 have dropped from around 28 per cent in December 2020 to 25 per cent in June 2025, while in the Nifty 500, ownership has slipped from 23 per cent to 20 per cent.Mid-cap ownership, however, has remained relatively stable between 13.5 and 16.3 per cent over the past five years. Elara believes mid-caps could attract renewed FII inflows given stronger earnings visibility and attractive valuations.
Reason 4: Macro tailwinds and policy support strengthen outlook
India’s economic environment continues to support earnings stabilization and long-term growth. Factors such as fiscal discipline, a supportive monetary stance, GST and income tax reforms, and expected pay commission payouts are expected to lift consumption and industrial activity.“While FY26 earnings will be led by commodity-linked sectors, FY27 growth should broaden as consumption and capex recovery take hold,” analysts said, as quoted by ET.Elara added that the second half of FY26 will be crucial in determining whether early signs of momentum can sustain, with Q3 serving as a “litmus test” for the real impact of GST cuts.
