Can Hopes of GST Relief, S&P Ratings Upgrade Rekindle FII Optimism for Indian Equities

Foreign institutional investors (FIIs) have stepped up selling in Indian equities this month, offloading ₹20,974.9 crore ($2.4 billion) in just the first fortnight of August, already surpassing the ₹17,740.6 crore ($2.1 billion) selloff seen through July. FIIs were net sellers in nine out of 11 trading sessions so far in August, with the pace of outflows intensifying as global trade uncertainty deepened after US President Donald Trump announced 50% tariffs on Indian exports.

A cocktail of muted Q1 earnings, stretched valuations, and escalating US–India trade tensions pushed FIIs to rotate allocations towards other emerging markets such as Korea, China, and Latin America, according to Motilal Oswal Financial Services.

Sharing similar views, VK Vijayakumar, Chief Investment Strategist, Geojit Investments blamed Trump’s harsh tariffs and the straining of relations between US and India to have impacted the market sentiment and the consequent surge in short positions from FIIs.

Despite the FII exodus, the Indian market still managed to post nearly 1% gains since the end of July, riding on the relentless inflows from domestic institutional investors.

And right while sentiment among FIIs were showing signs of further deterioration, a few tailwinds hit the market. First came India’s sovereign rating upgrade by S&P Ratings and then was the big bang announcement over a ‘next-gen,’ simpler and revamped version of the Goods and Services Tax by Diwali, revealed by PM Modi at his Independence Day address.

The recent flow of positive news not just bolstered sentiment amongst investors, but also sparked hopes of reviving consumption across sectors grappling with sluggishness in the recent times. “Policy reforms such as personal tax rebates, GST rationalisation, and the RBI’s 100 bps repo rate cut are expected to support demand and spur earnings recovery in the second half of 2025,” Motilal Oswal said.

Basis this, analysts are forecasting a stronger corporate performance ahead, which could turn out to be an elixir in reviving foreign investor confidence. “The past few days have witnessed a confluence of three key developments that, in our view, could rekindle sentiments in the Indian equity market,” the brokerage said.

Meanwhile, experts are also brewing hopes that these positive developments, along with several other existing factors would likely come together in H2, creating a conducive macro setting for growth acceleration, consumption pickup, and the return of FII confidence, MOFSL believes.

That said, some positivity may be already making its way since FIIs snapped a four-day selling streak and emerged net buyers of Indian equities on Monday, August 18, the day markets opened for trade after Modi’s GST tax cut announcements.

Looking ahead, Vijayakumar believes FII activity will be influenced by the action on the tariff front. “Latest news of easing tensions between the US and Russia and no further sanctions on Moscow indicate that the secondary tariff of 25% imposed on India is unlikely to come into effect after August 27. This is a positive," he said.