The International Monetary Fund (IMF) expects India to grow 7 per cent in 2026-27, the fastest pace among major economies. Foreign investors have still sold a record ₹3.08 lakh crore ($32.7 billion) of Indian shares this year. So, when will FII return to India? On the evidence, growth is not what they are selling. The triggers sit outside India: the Strait of Hormuz, US bond yields and a trade agreement still awaiting signature.
FII here means foreign institutional investors, the foreign portfolio investors (FPIs) whose flows India’s depositories report. The questions behind the headline are the ones Indian investors are asking: what is going on between Iran and the United States, whether the US midterm election is holding the war in place, how the Saudi-Houthi conflict could cool, where the India-US trade deal stands, and what institutions forecast. This article takes them in that order and ends with the sequence that decides the FII return.
Key takeaways
- Record selling: net FII equity sales reached ₹3.08 lakh crore by mid-October, against ₹1.66 lakh crore in all of 2025, according to depository data.
- Thinner cushion: domestic institutions bought 1.54 times what FIIs sold this year, down from 2.57 times in 2025.
- No dates: the IMF assumes Hormuz reopens in March 2027, and no signing date exists for the India-US trade agreement, so the FII return has no date either.
- No rate-cut help: the Reserve Bank of India raised the repo rate to 5.50 per cent on 7 October.
- Return sequence: the first political window for an FII return opens after the 3 November US midterms, but FII buying needs oil, US yields and tariffs to move together.
Why are FIIs selling Indian stocks when the economy is growing at 7 per cent?
Analysts link the selling to the cost of dollars and oil, not to India’s growth. National Securities Depository Limited (NSDL) data show net FII equity sales of ₹3.08 lakh crore ($32.7 billion) this year to mid-October, against ₹1.66 lakh crore in all of 2025. The reasons cited are US ten-year yields above 5.2 per cent, an AI-led rally in the United States, Taiwan and Korea, a weaker rupee and crude above $110 a barrel.
The gross numbers describe rotation more than exit. Compiled flow data show FIIs bought ₹32.8 lakh crore of Indian equities this year and sold ₹35.9 lakh crore, so net selling is under 9 per cent of sales. They also added ₹52,704 crore of Indian debt, against ₹9,256 crore in all of 2025, and put ₹56,485 crore into new share issues through 12 October.
Currency adds to the arithmetic. The rupee closed at 94.81 to the dollar on 22 October, and UOB and Danske Bank forecast 97 and 96.64 by year-end, which lowers the dollar return on Indian shares. Jignesh Desai of Centrum Broking says global money is chasing the AI and semiconductor trade in the US, Taiwan and Korea; another analyst in the same report argues that selling stays rational while US yields stay elevated.
Domestic money has done the absorbing. In exchange provisional data, domestic institutional investors (DIIs) bought a net ₹6.99 lakh crore of shares this year against FII net sales of ₹4.55 lakh crore. Systematic investment plans (SIPs) hit a record ₹32,490 crore in September, and equity mutual funds logged their 67th straight month of inflows, the Association of Mutual Funds in India (AMFI) reports.
Net cash-market flows, ₹ lakh crore. Exchange provisional data, 2026 year to date. DII cover is DII net purchases divided by FII net sales (TES calculation).
The cushion is thinner than it looks. DII buying covered FII selling 2.57 times in 2025 and 1.54 times so far in 2026, and this year’s DII purchases are already about 11 per cent below the 2025 total. Domestic flows have prevented a collapse; they have not produced a rally or an FII return. The Sensex closed at 73,123.83 on 23 October, its fourth straight fall and about 15 per cent below the December 2025 high of 86,159. TES covered the start of the slide in its report on Dalal Street’s 19 March crash.
None of this makes growth irrelevant; it means growth is not the variable FIIs are trading. TES’s 26-year analysis of GDP and the Nifty found a correlation of just 0.02 between the two and argued that global rates, oil and capital flows set the price the world pays for Indian growth.
Will the Strait of Hormuz reopen soon, and what is the US-Iran back channel doing?
No confirmed date exists. The IMF’s October baseline assumes Hormuz reopens in March 2027, with a broad return to pre-war conditions by October 2027. Talks between the United States and Iran run through Pakistan and Qatar, but the two capitals tell different stories: Iran says Washington accepted its seven-day proposal, while the US has not confirmed it and President Donald Trump has denied that talks are under way. For the FII return, the first proof point is traffic, not talks.
The back channel is real and crowded. Iran’s foreign minister Abbas Araghchi says indirect talks continue without interruption through Pakistan and Qatar, and Pakistan’s army chief Asim Munir was in Tehran on 20 October. Messages also pass through China, according to Gulf and Pakistani diplomatic sources. Qatar says it remains a mediator.
Qatari media reported on 20 October that Qatar and Pakistan tabled a compromise both sides provisionally accepted, with International Atomic Energy Agency (IAEA) inspections of Iranian nuclear sites and some release of $6 billion in Iranian funds held in Qatar. Neither government has confirmed it, so it should be read as a report, not a deal.
The gaps are specific. Mohsen Rezaei, secretary of Iran’s Supreme National Security Council, told Munir that no enriched material will leave Iran. Washington wants a verifiable, lasting limit: Vice President JD Vance has asked for a meaningful cut in enrichment capacity, and Trump has called for zero enrichment. Iran says enrichment is a right under the Nuclear Non-Proliferation Treaty and wants the US naval blockade and sanctions lifted before wider nuclear talks.
New Delhi has its own line to Tehran. India’s National Security Advisor spoke to Rezaei on 12 October and raised the safety of Indian seafarers and tankers, the Ministry of External Affairs (MEA) said on 14 October. The ministry has also called for stability in global energy markets and an immediate end to attacks on civilian infrastructure in Saudi Arabia.
Crude shows how much remains unsettled: Brent has traded above $110 a barrel this week, touching $113, against the IMF’s assumption of an average $96 for 2026. TES examined the physical limits on a prolonged closure in its earlier analysis of why the Strait of Hormuz cannot stay closed.
Is the US midterm election the main reason the Iran war continues?
It is one clock, not the only one. President Trump has said the US will not attack Iran before the 3 November midterms, and he and Israeli Prime Minister Benjamin Netanyahu have renewed threats of fresh strikes afterwards. Analysts at Macquarie and Deutsche Bank argue that both sides are boxed in until the vote. The uranium dispute, however, does not end on 4 November.
The analysts’ case: US petrol prices are about 40 per cent higher than a year ago, according to AAA, so Tehran gains from keeping fuel dear while Trump cannot accept an outcome that looks like surrender. Trump has accused Iran of inventing attacks on seven tankers to lift oil before the vote; the Revolutionary Guards’ claims remain uncorroborated.
The counter-case has weight too. A Deutsche Bank straw poll found that 83 per cent of surveyed investors thought Trump had a domestic incentive to end the war before the election, while Iran had none. Trump said in September that he expected the war to end immediately after the vote. Both readings make 3 November a hinge for the FII return.
TES’s assessment is that, for the FII return, the election is a window, not a switch. It removes one US domestic incentive and leaves the enrichment, blockade-sequencing and guarantee disputes where they are.
Can the Saudi-Houthi conflict ease before the wider Iran war does?
Probably not on its own. One analysis concluded that a Saudi-Houthi settlement looks unlikely without a breakthrough in the wider Iran war, because Iran is the only country with leverage over the Houthis. Oman is facilitating contacts, the Houthis want Riyadh to lift its blockade of territory they hold, and Saudi Arabia says the Houthis refused talks.
The attacks have reached Indians. The MEA condemned the strikes on civilian infrastructure, including the one on Aramco headquarters on 13 October, and said they must stop immediately. On 14 October it said one person injured in the 10 October attack had died and eight remain in hospital, four in intensive care. Indian carriers’ flights to Riyadh, Dammam, Medina and Jeddah are disrupted, while Saudi carriers still fly.
Efforts run in parallel, not together. The Houthi side says Oman offered a five-day truce and that it will stop attacks if Riyadh meets its humanitarian demands. A senior Saudi diplomat says the Houthis refused a meeting in Oman in July, calls Oman a facilitator and not a mediator, and accuses Iran of backing the escalation. Egypt has agreed to help Saudi Arabia defend itself, and Al-Azhar has called for an urgent mediation committee.
The attacks are also the first test of the three-nation Mecca Joint Defence Agreement, which TES analysed in August. The Bab el-Mandeb Strait, which carries about 7 per cent of global oil, is now disputed, according to the House of Commons Library. A Saudi-Houthi lull would help the FII return only through crude, and crude follows Hormuz.
Where does the India-US trade deal stand, and what does the 10 per cent tariff change?
No signing date has been announced. Commerce Minister Piyush Goyal said on 15 October that the first tranche of the bilateral trade agreement (BTA) is finalised and in legal drafting. US Secretary of State Marco Rubio said on 20 October that the two sides are about as close as they can be without having executed it, and the MEA said both sides welcomed the progress and reaffirmed early conclusion. A signature is a precondition for the FII return, not a cause of it.
Meanwhile Indian goods face a 10 per cent US duty under Section 301 of the Trade Act since 24 July, the lower of two tiers. The 43 countries without a ban on forced-labour imports, including China and Vietnam, pay 12.5 per cent. India moved into the lower tier after amending its foreign trade policy on 14 June. The 18 per cent rate in the 6 February framework rested on emergency-powers authority that the US Supreme Court struck down on 20 February, and it was never applied.
The tier is not yet an advantage over every rival. Bangladesh is in the same 10 per cent tier, and India has not received the textile and apparel tariff-rate quota that Bangladesh, Cambodia, Indonesia and Malaysia have. Goyal has said India will sign once Washington offers a rate that gives Indian exporters an edge over competitors. Reports differ on how much US-bound trade the duty covers, from about 55 per cent in one to about 70 per cent from the Global Trade Research Initiative (GTRI).
Exporters have not waited. Shipments to the US rose 48 per cent in September to $8.02 billion and 11.11 per cent in April-September to $50.81 billion, helped by a low base and by front-loading ahead of further US action, according to the Federation of Indian Export Organisations. Imports from the US rose 25.98 per cent to $32.32 billion, which narrowed the merchandise surplus with the US to $18.49 billion.
Two risks remain open. The US Trade Representative’s Section 301 inquiry into excess manufacturing capacity is still pending, and the Sanctioning Russia and Iran Act, signed on 18 September with provision for tariffs of up to 100 per cent on large buyers of Russian oil, was waived by executive order in mid-October, just before its 30-day window closed. That is a waiver, not a repeal.
The MEA says it has conveyed India’s concerns about the law to Washington. Russia’s share of India’s crude imports fell from over 50 per cent in July to about 35 per cent in September, according to Kpler, so the exposure has already shrunk.
When will FII return to India? A sequence of triggers, not a single date
On TES’s reading, FIIs return in stages once three conditions are visible together: confirmed commercial tanker traffic through Hormuz, US ten-year yields easing from the 5.2 per cent-plus levels that sparked the selling, and a signed India-US tariff schedule. None carries a date. The first political window opens after the 3 November midterms, while the IMF’s baseline puts normal Hormuz traffic in March 2027.
Which trigger brings FIIs back to India first?
Oil and Hormuz come first, because crude drives the rupee, inflation and the Reserve Bank of India (RBI) at once. The 10-year government bond yield reached 7.18 per cent on 30 September, a four-month high, as inflation worries, crude and global yields pushed it up, AMFI notes. On 7 October the RBI raised the repo rate by 25 basis points to 5.50 per cent, its first increase since February 2023, and moved to a calibrated tightening stance. HSBC expects another 25 basis points at the 2-4 December meeting.
That shuts the usual domestic route. A rate cut cannot supply the booster dose, so relief for the FII return has to come from outside India, with earnings following. New Delhi’s levers are diplomatic and commercial: the MEA’s lines to Tehran, Riyadh and Washington, and the first tranche of the trade agreement now in legal drafting.
US yields are the one trigger New Delhi cannot touch. While the ten-year stays above 5.2 per cent, a foreign fund can earn a dollar return without taking rupee or war risk, and that arithmetic keeps FII selling rational even when India’s growth forecast rises. The tariff schedule is the trigger closest to India’s own control. A signed text would strengthen the FII return case by removing one uncertainty, and forex dealers already cite hopes of a US trade agreement as a possible source of dollar inflows. It cannot, on its own, change the price of crude.
TES maps three outcomes for the weeks after 3 November.
| Scenario | What would have to happen | Likely effect on crude and rupee | Likely FII behaviour |
|---|---|---|---|
| Phased reopening | Commercial tanker traffic through Hormuz confirmed; India-US tariff text signed | Crude eases from above $110; rupee recovers some ground | Selling slows first; sustained net buying also needs lower US yields |
| Muddle through | Talks continue without a signed text; no new strikes | Crude stays elevated; rupee range-bound to weaker, as bank forecasts of 96.64 to 97 imply | Net selling continues at a slower pace; domestic SIP flows carry the market |
| Strikes resume after 3 November | Talks fail; Gulf attacks widen | Crude rises further; rupee weakens; more pressure on inflation and the RBI | Selling accelerates; sectors that import crude lose most |
TES assessment, not a forecast. Directions only; no price targets.
FIIs have reversed before, and quickly. In 2022 they were net sellers of ₹1.21 lakh crore of Indian equities; in 2023 they were net buyers of ₹1.77 lakh crore, a swing of ₹2.98 lakh crore in one year. TES’s reading is that such reversals follow the external price of money, which is why the sequence above counts for more than any single announcement.
What do the IMF, Bernstein and the RBI forecast for Indian markets?
The IMF is bullish on growth; the brokerages are cautious on prices. The Fund has raised India’s growth forecast to 7 per cent for both 2026-27 and 2027-28, a 0.6-point upgrade for the current year from July, with 7.4 per cent on a calendar-year basis for 2026. Bernstein has cut its December 2026 Nifty target to 25,000 from 26,000, about 11 per cent above Friday’s close of 22,600 by TES’s arithmetic.
Bernstein says Indian equities look cheaper after the correction but remain expensive against global peers, and expects the recovery to come from mean reversion, not from a new earnings-led upcycle. The RBI has turned to tightening, HSBC expects a further hike in December, and UOB and Danske Bank see the rupee at 96.64 to 97 by year-end, which would keep currency risk on any FII return.
The IMF’s own caution bears on timing: its chief economist Silvana Tenreyro said risks tilt to the downside, and its baseline has Hormuz reopening only in March 2027. If that holds, foreign money has little macro reason to hurry, and an early FII return would be a trade on diplomacy, not data.
What to watch between now and the RBI’s December meeting
When will FII return to India?
No date has been announced. TES expects a staged FII return, with the first political window after the 3 November US midterms and confirmed tanker traffic through Hormuz as the first proof point. The IMF’s baseline assumes normal conditions only by October 2027, so early buying would be a trade on diplomacy.
Is the US midterm election the reason the Iran war is still on?
It is one reason. President Trump has ruled out an attack before 3 November, and analysts say both sides are waiting for the vote, but the dispute over enriched uranium and the sequence of sanctions relief remains unresolved.
Will the India-US trade deal be signed soon?
Commerce Minister Piyush Goyal said on 15 October that the first tranche is finalised and in legal drafting, and US Secretary of State Marco Rubio said on 20 October that the two sides are very close. No signing date has been announced. A signed text would help the FII return case.
Can the Saudi-Houthi conflict ease on its own?
Unlikely. One analysis judged a settlement improbable without a breakthrough in the wider Iran war. Oman is facilitating contacts, but the Houthis and Saudi Arabia still dispute who refused talks and on what terms.
What is the Nifty forecast for December 2026?
Bernstein’s target is 25,000, cut from 26,000, about 11 per cent above the 23 October close of 22,600. The brokerage expects recovery through mean reversion, not a new earnings-led upcycle.
The booster dose is external, and its calendar starts on 3 November
The next ten days will say little about India’s growth and a good deal about the price of capital. If 3 November passes without strikes and November data show tankers moving through Hormuz, the FII return, if it comes, will start as a relief trade on crude and the rupee, not a growth trade, and the first FII buying will show in NSDL data. The 2023 swing shows how fast that can happen.
If the window closes without a text, India’s 7 per cent growth will keep being sold at a discount, while mutual fund equity inflows, positive for 67 straight months, keep absorbing it.
Source note. IMF World Economic Outlook (October 2026), NSDL and exchange flow data, AMFI, RBI, MEA and Commerce Ministry statements, US government announcements, and wire-service reporting. Figures are as of 23 October 2026.
