Rupee Stabilizes, Inflation in Check — FIIs Return to India’s Markets

A couple of months ago, we discussed how Foreign Institutional Investors (FIIs) were pulling money out of Indian markets. Rising U.S. bond yields, a strengthening dollar, and more attractive risk-free returns abroad were driving capital away from emerging markets like India. (You can read the previous blog here: FII Exit from Indian Markets: Beneficial or a Missed Opportunity) 

But over the past few weeks, there’s been a quiet yet powerful shift — FIIs are coming back. The reasons behind this reversal are rooted in both global and domestic market dynamics, and it's worth breaking them down clearly. 

India’s Outperformance on the Global Stage 

While markets across the US, China, Japan, and Europe are still struggling to reclaim their pre-volatility levels, India has quietly surged ahead. Not only have we recovered the ground lost in previous corrections, but key indices like the Nifty have also been testing and crossing important resistance levels. 

In a world full of economic uncertainty, this kind of relative strength matters. Global investors chase markets where the risk-reward equation tilts in their favor, and right now, India offers just that.  As you can see in the chart Below-

(Chart1- Nifty V/S S&P 500)( Nifty outperforming S&P500) 

Valuations Have Corrected, Making Markets Attractive Again 

One of the reasons FIIs had backed off earlier was because of stretched valuations. Indian equities, especially frontline indices like Nifty 50, were trading at elevated price-to-earnings (P/E) multiples, making them expensive relative to other emerging markets. 

However, as you can see in the chart below, the Nifty 50 P/E ratio has corrected meaningfully over the past few months, hitting a low in early 2025 (19.7) before rebounding. The index P/E, which had hovered above 23–24x in mid-2024, cooled off to sub-20x levels in recent months — bringing it closer to its long-term median of 21.8x. 

(Chart 2 - Nifty50 Index P/E chart ~ screener) (P/E Correction from high of 42 to low of 19.7)

This valuation correction made Indian equities fundamentally more attractive for FIIs, especially against the backdrop of a softer dollar and improving domestic data. 

Falling Lending Rates and a Strong Banking Sector 

Another major positive for India has been the reduction in lending rates by major banks after the RBI’s repo rate cuts. But more importantly — beyond just lowering rates — the RBI recently injected fresh liquidity into the system for the first time in about five years, as reported by Bloomberg. 
Lower borrowing costs fuel economic activity, boost corporate earnings, and support market sentiment — all of which FIIs are closely watching.  
The banking sector has already responded, with the Bank Nifty hitting fresh highs (as you can see in chart below), signaling underlying strength and optimism 

 
(Chart 3- Bank Nifty in uptrend) 

Inflation Under Control 

Inflation in India has cooled dramatically — retail inflation is down to 3.34%, the lowest in six years (As seen in chat below), and food inflation has dropped significantly as well. This creates room for further monetary easing if required and reassures investors about India’s macroeconomic stability. 

(Chart 4- India Inflation Rate ~Trading Economics) 

USD/INR: Is the Rupee Weakness Finally Taking a Breather? 

If you’ve tracked the USD/INR chart since 2021, you’d know it’s been in a solid uptrend. This was fueled by rising US bond yields and a strong dollar, prompting FIIs to exit Indian markets. 

But over the last couple of months, things have started to turn (As you can see in the chart below). As US bond yields declined, expectations of a pause or rate cuts by the Fed grew, and FIIs slowly started coming back to India. 

The USD/INR pair saw a noticeable drop recently, right as FIIs turned net buyers and Nifty began reclaiming key levels. A more stable rupee boosts FII confidence, wheels in imported inflation, and gives the RBI more flexibility on interest rates. 
 
(Chart5- USD/INR Rate)

 

FII Buying Already Picking Up 

Recent data shows that FIIs have turned net buyers on multiple days in April. (As you can see in the chart below) While the overall month-to-date figure remained in the red initially, the momentum has clearly shifted. March 2025 was the first month since October 2024 to record net FII buying — and this buying pressure has carried into April. 

In early 2025, FIIs made a strong comeback to Indian markets, mainly in the financial sector. This resurgence was driven by softening U.S. bond yields, reducing the appeal of risk-free returns abroad, and a stabilizing Indian rupee that eased currency risks.  

 

(Chart 6- FII net buying/selling on Daily Basis) (Net Buyers on last multiple days) 

If this trend continues, supported by improving macros, a stable rupee, and healthy corporate earnings, we could be witnessing a sustained phase of FII inflows. 

USD Instability and Gold's Surge 

Traditionally, gold and the US dollar have an inverse relationship. However, both have been strengthening simultaneously, signaling deeper financial instability and geopolitical concerns. Gold typically rises amid economic uncertainty or a weakening dollar, but the current scenario suggests investors are hedging against multiple risks, including inflation and economic slowdowns. As of April 2025, the U.S. Dollar Index (DXY) has dropped to its lowest level since early 2022, now trading below 98. This depreciation has contributed to the surge in gold prices, which breached $3,000 per ounce in March 2025 amid escalating trade tensions. ​ 
 

 
(Chart 7- US dollar Index {DXY} {Blue} V/S Gold {Red}) (There is 0 returns in USD while gold has doubled the investment since 2020) 
 

Tariff Tension- 

On top of that, fresh tariff tensions stirred up by Trump’s trade talk have made global manufacturers rethink their supply chain strategies. With the U.S. hinting at higher import duties on Chinese and other Asian goods, India’s looking like an increasingly attractive option for companies to set up shop and export worldwide. Combine that with a stable rupee, inflation under control, and a growing domestic market, and it’s easy to see why foreign investors are warming up to India again. 

A Word of Caution 

It’s important not to get carried away. Risks still exist: 

• A potential US recession could impact global risk sentiment. 
• Unfavorable quarterly results, especially from sectors like IT, may dampen the overall market mood. 
• Any sharp moves in global tariff policies or geopolitics could also disrupt capital flows. 

Keeping an eye on these developments will be key for market participants. 

Final Thoughts: A Bullish Setup for India 

The return of FIIs isn’t happening in isolation. FIIs returning to Indian markets feels more like a calculated move than a fleeting reaction. With inflation under control, interest rates easing, and the rupee showing signs of stability, India is ticking a lot of the right boxes. Sure, there are global risks to watch out for, but the overall setup looks solid. If the current momentum holds, we might be at the start of something bigger — a fresh wave of sustained investor confidence in India’s growth story.