FIIs Invest Rs 29,631 Cr In August; But Why Large Caps Still Remain Under Pressure

Foreign Institutional Investors (FIIs) invested Rs 29,631 crore in Indian equities in August 2026, marking their highest monthly net inflow in 23 months, according to data from the National Securities Depository. The inflow was the strongest since September 2024 and marked the second consecutive month of foreign buying after a four-month selling streak.

Foreign investors have turned net buyers of Indian equities for two consecutive months for the first time this calendar year. In July, FIIs invested Rs 20,200 crore in Indian stocks, partially reversing the Rs 49,340-crore outflow recorded in June.

With the July and August inflows combined, FII investment in Indian equities stood at Rs 49,831 crore, broadly offsetting the outflow seen in June.

Why FII Sentiment Improved

Measures taken by the Reserve Bank of India to support the rupee and attract foreign capital into debt markets, along with a strong June-quarter earnings season, have helped improve investor sentiment.

Profit after tax of Nifty 50 companies grew at its fastest pace in 10 quarters, according to at least five brokerages. Several brokerages, including Motilal Oswal and PhillipCapital, subsequently raised their earnings estimates for FY27.

However, the return of foreign money has not translated into a broad-based rally in large-cap stocks.

Why Nifty, Sensex remain Under Pressure

N. ArunaGiri, Founder & CEO of TrustLine Holdings, said the traditional relationship between positive FII flows and large-cap market performance appears to have weakened.

While FII inflows exceeded $3.2 billion in August as of August 30, the Nifty continued to trade around 8.2 percent below its all-time high recorded in early January 2026. At the same time, small- and mid-cap indices were trading near or at record highs.

According to ArunaGiri, the composition of FII flows provides an important explanation. In July, only around $0.7 billion of the more than $2 billion inflow came through the secondary market, while the rest flowed into the primary market through QIPs, preferential allotments and IPOs.

The trend continued in August, with more than $1.2 billion coming through the primary market and around $1.9 billion through exchanges. As a result, actual FII buying through the secondary market over the past two months amounted to only around $2.68 billion.

Primary-market investments do not necessarily create broad-based buying in existing listed stocks, as the funds are absorbed by companies, promoters and private-equity exits.

ArunaGiri also said FIIs appear to be selectively buying large mid-cap stocks despite elevated valuations, while largely avoiding financial and IT heavyweights, which together account for more than 44 percent of the Nifty.

Debt-market Flows Weaken

The strong momentum in the debt market seen over the previous two months failed to continue in August. FIIs became net sellers of general-limit debt securities, offloading Rs 2,224 crore during the month.

Investment in government securities under the Fully Accessible Route (FAR) also weakened sharply. FII investment in FAR bonds stood at just Rs 264 crore in August, compared with Rs 21,652 crore in June.

Despite the moderation in debt inflows, overall FII flows remained positive for the third consecutive month, with net inflows of Rs 25,492 crore in August against Rs 40,031 crore in July.

Valuations Remain A Concern

FIIs had previously reduced their exposure to Indian equities amid concerns that valuations were expensive relative to corporate earnings. India's price-to-earnings ratio stood at 23.88 times as of July 31, 2026, according to the MSCI Index factsheet.

The MSCI India index gained 9.49 percent in 2025, significantly underperforming the MSCI Emerging Markets index, which rose 41.05 percent.

Meanwhile, the spread between US and Indian benchmark 10-year government bond yields narrowed to around 2.1-2.3 percentage points in August. The narrower differential reduces the relative advantage of Indian government securities over US Treasuries and could influence foreign investors' asset-allocation decisions.

ArunaGiri said the headline FII flow number can therefore be misleading. A meaningful large-cap rally would require a stronger and broader turnaround in secondary-market FII flows, particularly into index heavyweights.

For now, selective FII buying is providing greater support to mid-caps, while small-caps are benefiting from the positive sentiment surrounding the changing nature of foreign flows.