Foreign investors have yet again made their way to the Indian financial market, observing the pace at which it is improving daily. With President Donald Trump re-elected in November 2024, fears of aggressive trade policies and tariff hikes have started to fade, calming investor nerves and attracting foreign investment in India without any further doubts. This push, however, has taken the equity inflows to the highest level over the past 10 months on April 25.
After the US elections, investors pulled out a large fund worth $7.7 billion from the emerging markets, including India, Hong Kong, Taiwan, and Brazil, into US assets. However, the scenario has begun to change over the last three weeks, especially for India, with foreign inflows getting stronger every day. The Indian market has managed to receive 12% of the exodus funds back, which approximately amounts to $960 million.
The Current Market Scenario in India
Indian equity benchmarks closed higher on Monday, May 5, 2025, supported by sustained foreign portfolio investment (FPI), optimism around a potential India-US trade deal, and easing crude oil prices. The Nifty 50 rose 0.47% to 24,461.15, while the BSE Sensex gained 0.37% to 80,796.84. FPIs extended their buying streak for a 12th straight session, investing ₹40,147 crore, the longest such run in two years.
Oil and gas stocks led sectoral gains, rising 1.7% as OPEC+ plans to boost supply pulled oil prices lower, benefiting refiners like BPCL, IOC, and HPCL. Mahindra & Mahindra jumped 3.3% on strong Q4 earnings, lifting the auto index 1.9%. Adani Group shares surged after reports of talks with U.S. officials, with Adani Enterprises and Adani Ports climbing over 6%. However, Kotak Mahindra Bank fell 4.6% after missing profit estimates. Broader markets outperformed, with mid- and small-cap indices gaining 1.8% and 1%, respectively.
Let’s Talk About the Investment Market
The investment climate in India has recently turned more optimistic, driven by improving global sentiment, strong domestic macroeconomic indicators, and a robust rally in large-cap stocks. After months of caution, foreign portfolio investors (FPIs) are returning to Indian equities, causing a 10-month high surge in the equity inflows, thereby marking a notable reversal from the earlier trend of persistent outflows.
Throughout much of the past year, foreign investors remained on the sidelines amid concerns over global inflation, rising interest rates in developed markets, and geopolitical tensions. These factors led to capital moving away from emerging markets like India and into safer, dollar-denominated assets such as US treasuries. In India specifically, fears around high valuations and sectoral underperformance also weighed on sentiment.
The significance of foreign investment in India cannot be overstated. It reflects renewed confidence in India’s long-term growth story and its position as a key emerging market. More importantly, it helps deepen market liquidity, supports stock valuations, and reinforces India’s appeal as a destination for global capital, even in a still-cautious global investment environment.
What’s Driving the Foreign Investment in India?
Three key factors stand out: leadership by large-cap stocks, favorable macroeconomic conditions, and a more risk-on global investment mood.
1. Safer Bets, Better Fundamentals
Foreign investors are gravitating toward a large-cap stocks rally, which offers more stability, stronger balance sheets, and better earnings visibility. In a global environment that still carries some uncertainty, large caps are viewed as safer bets. Companies in sectors like financials, energy, and IT are drawing interest due to their scale, resilience, and global linkages. The Nifty and Sensex’s recent gains reflect this preference, with institutional money flowing primarily into these blue-chip names.
2. Stable Rupee, Easing Inflation, Favorable Interest Rate Outlook
India’s macroeconomic environment is proving supportive. The rupee has remained relatively stable, inflation is moderating, and the Reserve Bank of India has maintained a balanced policy stance. These factors reduce currency risk for foreign investors and improve real returns. India’s consistent GDP growth projections also offer a positive long-term outlook, especially compared to some other emerging markets facing fiscal or political challenges.
3. Global Sentiment
Globally, investor risk appetite is improving. Expectations of interest rate cuts by the U.S. Federal Reserve and other central banks are making emerging markets attractive again. Additionally, the re-election of US President Donald Trump has reduced near-term policy uncertainty, calming fears of aggressive trade or geopolitical shifts. Within this global context, India stands out due to its political stability, economic growth potential, and reform momentum.
Together, these factors are restoring foreign investor confidence and positioning India as a preferred destination for global equity capital.
Stock Market Foreign Inflows & Equity Prices: The Connection
The recent push to FPI equity inflows 2025, resulting in a 10-month high in inflows, has had a direct and positive impact on stock prices. The foreign investment in India brings in significant liquidity, particularly into large-cap and sector-leading stocks, which boosts demand and drives up valuations. This renewed buying interest has supported a steady rise in benchmark indices like the Sensex and Nifty.
As global sentiment improves and India stands out with macroeconomic stability and strong corporate earnings, FPIs are reallocating capital back into Indian markets. In the past 12 sessions alone, foreign investors have pumped in over ₹40,000 crore, helping lift both large-cap and broader market indices. Sectors like oil & gas, autos, and infrastructure have especially benefited.
Such positive changes in the FPI trends in Indian market not only raise prices but also signal confidence in India’s long-term growth story. Higher equity prices attract more domestic and institutional investors, creating market strength. Thus, foreign inflows act as both a catalyst and a confidence booster for Indian equities, reinforcing India’s position as a key destination for global capital.
Impact on Indian Rupee
The Indian rupee strengthened to 84.25 per U.S. dollar on May 5, 2025, marking a 0.4% gain from the previous day. The combination of factors responsible for it included sustained foreign portfolio investment (FPI) inflows, declining crude oil prices, and a weaker US dollar.
FPIs have been net buyers of Indian equities, contributing to increased demand for the rupee as foreign capital enters the market. Additionally, falling crude oil prices, influenced by OPEC+’s decision to boost oil production, have eased concerns over India’s import bill, reducing pressure on the rupee. The US dollar index also declined, making emerging market currencies like the rupee more attractive to investors.
Conclusion
The return of foreign investors, driving equity inflows to a 10-month high, presents both opportunities and risks. While current macroeconomic factors like stable oil prices, favorable interest rate expectations, and India’s strong growth outlook support a positive market sentiment, the sustainability of this trend depends on global economic conditions. Any reversal in factors like global inflation, geopolitical tensions, or policy shifts in major economies could alter investor behavior. For now, the inflows seem robust, but continued stability in oil prices and the global economy is crucial for this trend to be sustained long-term.
