Indian equities are poised for a potential recovery, contingent upon a slowdown or cessation of Foreign Institutional Investor (FII) outflows, according to Motilal Oswal Financial Services. The firm suggests that even a slight indication of a pause in the persistent selling by FIIs could trigger a positive turnaround in the market.
Persistent Outflows and Market Underperformance
The Indian stock market has been underperforming relative to its global peers in 2025, with FIIs withdrawing significant amounts of capital. So far in 2025, FII outflows have touched ₹1,98,103 crore. September alone witnessed outflows of ₹27,163 crore. This selling trend has been ongoing for nearly two years, with total outflows reaching ₹3,19,313 crore over the past 21 months. Concerns over high valuations, adverse tariff outcomes, and a weakening currency have contributed to this exodus. The rupee has depreciated more than 3.5% against the dollar in 2025.
Domestic Resilience
Despite the FII selling pressure, the Indian market has demonstrated resilience, supported by strong domestic inflows from Domestic Institutional Investors (DIIs) and retail investors. DIIs, including mutual funds, insurance companies, and pension funds, have been actively buying Indian equities, cushioning the impact of FII outflows. In the first half of 2025, DII inflows reached $42 billion, reflecting the confidence of domestic investors in the Indian market. This resilience is also fueled by strong macroeconomic fundamentals, with GDP growth expected to be above 6% in the financial year 2025.
Triggers for Recovery
Motilal Oswal believes that a recovery is possible with a pause in FII selling, spurred by several factors:
- Stabilizing Valuations: Recent market corrections have made Indian equities more reasonably valued, potentially attracting foreign investors back.
- Improved Corporate Earnings: Expectations of earnings recovery in the coming quarters could improve market sentiment and encourage FIIs to reinvest in Indian equities.
- Pro-Growth Policies: Government initiatives such as GST rate cuts and a supportive monetary policy stance could revive foreign investor interest.
- Long-Term Growth Story: India remains the fastest-growing major economy globally, with a potential GDP of $32 trillion by 2047, making it an attractive long-term investment destination.
Sectoral Outlook
Several sectors are expected to benefit from a potential market recovery:
- PSU Banks and Metals: These sectors have shown strong gains recently.
- Automobiles, Insurance, and Consumer Goods: These sectors are expected to benefit from GST rate cuts and increased consumption.
- Power/Renewables: ACME Solar is a top pick, poised for growth with expanding capacity and project execution.
- Hero Motocorp: Anticipates robust festive sales and rural recovery, projecting an upside with improved volumes and margins.
Investment Strategy
Given the current market dynamics, Motilal Oswal recommends a focus on domestic-oriented stocks, driven by expectations of a domestic recovery. While small and mid-cap stocks may be expensively valued, select high-conviction names in these segments could offer good investment opportunities.
Disclaimer: The information provided in this article is for informational purposes only and does not constitute investment advice. It is essential to consult with a qualified financial advisor before making any investment decisions.
