In late February, the West Asia war sparked a massive $28 billion withdrawal by foreign portfolio investors (FPIs) from India’s domestic equity markets. After a four‑month hiatus, the first ten days of July saw FIIs turn net buyers, adding $1.6 billion to Indian equities – a figure that, while encouraging, is unlikely to reshape market dynamics on its own.

Backdrop: Four Months of Capital Flight

The February‑March conflict heightened geopolitical risk, prompting global investors to retreat from emerging‑market assets. Simultaneously, the AI‑driven rally in tech‑heavy markets such as South Korea appeared over‑extended, further accelerating the outflow. The combined effect pushed the Nifty and Sensex down by roughly 2‑3 % during the period.

US‑Iran Peace Deal as a Market Catalyst

On June 14, the announcement of a US‑Iran peace agreement shifted sentiment. In the second half of June, FIIs posted a net inflow of $1.1 billion after a $6.7 billion outflow in the first half. The reversal was led mainly by U.S. and European funds seeking a safe‑haven narrative, with India positioned as a relatively stable alternative.

Valuation Reset Amid AI Hype

Motilal Oswal’s research notes that India’s valuation premium over other emerging markets fell to a historic low of 18 % in June, well below its long‑term average of 73 % and the 2022 peak of 147 %. This compression reduces the cost of capital for foreign investors, making Indian equities appear more attractive despite broader market volatility.

Policy Moves that Boost Confidence

On June 5, the RBI and the Government introduced measures to attract foreign participation in the debt market, raising debt inflows from $291 million in May to $5.8 billion in June. The policy lift improved the balance of payments, deepened foreign participation, and helped stabilize the rupee – a critical factor for overseas equity investors wary of currency erosion.

Fragile Recovery Signals

The market’s fragility was exposed on Wednesday when it slipped more than 2 % after former President Donald Trump announced the end of the cease‑fire with Iran. Dhananjay Sinha, CEO of Systematix Group, cautioned that “the inflows are far too modest to extrapolate any positive trend; the market remains expensive with no clear earnings growth trajectory.”

While the average net profit of Nifty‑50 companies grew in the mid‑single digits in FY26, it still lags far behind the 15‑20 % post‑COVID surge, underscoring earnings‑growth concerns.

In sum, the modest re‑entry of FIIs signals a tentative optimism but does not yet constitute a sustainable market rally. Continued macro‑economic stability, credible policy support, and a clearer earnings outlook will be essential for converting this early momentum into lasting capital inflows.