Two big triggers that could stop FIIs from selling India stocks in H2FY26

The odds of foreign institutional investors (FIIs) returning to India, anytime soon, have worsened after the August industrial production data revealed the impact of US President Donald Trump's trade tariffs, cautioned analysts.

 

Industrial production (IP) growth underwhelmed at 4 per cent year-on-year (Y-o-Y) in August, down from 4.3 per cent in July. The print was also below Street expectations of 5.1 per cent.

 

Most sectors, including manufacturing, Capital, and consumer durable goods, and Infrastructure witnessed moderation in growth, while consumer non-durables contracted sharply.

 

According to analysts at Nomura, the August industrial production data were likely in the crosswinds of the negative impact of the 25 per cent tariffs (effective August 7; followed by additional 25 per cent Aug 27 onwards).

 

"September IIP growth will witness the impact of 50 per cent US tariffs. Domestically, firms witnessed a sharp drop in retail sales in the run-up to the GST cuts," it said.

 

With this, analysts expect FIIs to remain net sellers in India if the negative shock from higher US tariffs offsets the boost from goods and services tax (GST) cuts.

 

"Indian stock markets are likely witnessing a time-wise correction amid US tariff uncertainties and muted corporate earnings. FIIs are in a wait-and-watch mode, closely tracking tariff negotiations and a meaningful pickup in quarterly earnings," said Ankur Jhaveri, MD and CEO, Institutional Equities, JM Financial Institutional Securities.

 

A record exodus

Thus far this year (till Sept 29), benchmarks -- BSE Sensex and NSE Nifty50 – have advanced 2.9 per cent and 4.2 per cent, respectively, amid a ₹2.5-trillion FIIs' rout.

 

In CY24, the benchmarks rallied up to 8.8 per cent amid a ₹3.02 trillion sell-off by FIIs, while they surged up to 20 per cent against a FII-selling of ₹14,719 crore. 

 

 

By comparison, DIIs have bought Indian equities worth ₹5.73 trillion so far in 2025, ₹5.26 trillion in 2024, and ₹1.73 trillion in 2023.

 

Limited ammunition

The near-record selling by foreign investors has come at a time when policymakers have already played their best cards, for now, analysts opine.

 

The Government has doled out income tax and GST rate cuts, and the Reserve Bank of India (RBI) has slashed repo rate by 100 basis points (bps), cumulatively, in 2025.

 

Besides, the Government has also allowed e-commerce giants to buy locally and directly export, hoping to give India's trade dynamics a much-needed push.

 

"The RBI is expected to keep the repo rate steady at 5.50 per cent going forward. Separately, New Delhi's economic managers are keeping their poker faces on, shuffling reforms, and hoping the hand they have dealt can withstand both monsoon vagaries and tariff tantrums," noted analysts at Anand Rathi.

 

As most analysts were pinning hopes on earnings recovery in the second half of the current financial year (H2FY26) aided by GST cut-led consumption boost, the August IIP data has put that assumption to test.

 

"India Inc has been reporting weak earnings growth even as the market traded at relatively higher valuations compared to global context. Add to it, US tariffs, geopolitics, and currency depreciation soured sentiment, accentuating FII outflows in 2025. FII flows could return to India only if India and the US strike a trade deal over the next few months, and there is a visible improvement in earnings growth in H2FY26," said Sandip Bansal, Deputy CIO, ASK Investment Managers.