After months of heavy outflows totalling nearly Rs 2 lakh crore in 2025 alone, foreign institutional investors (FIIs) may finally be re-evaluating their
stance on Indian equities. According to a note from Elara Capital, a combination of stabilising valuations, resilient earnings, and macroeconomic strength could soon drive a turnaround in foreign fund flows, states The Economic Times report. India’s representation in emerging market (EM) indices has steadily increased, rising from just 6 per cent in 2009 to nearly 18 per cent today. Despite this growth, Elara highlights a critical gap: actual FII allocations still lag significantly. “India remains significantly under-owned relative to its weight in EM indices,” the brokerage notes, as per the report. This underweight positioning has persisted since the COVID era, especially between 2023 and 2025, as global funds pivoted towards North Asia’s tech-heavy markets, the report added. But with earnings revisions now stabilising and India’s relative growth outlook improving, this allocation gap could begin to close. Valuation Gap Narrows, India’s ROE Still Stands Tall Although India continues to trade at a premium to other EMs, the disparity is far less stark than in previous years. The MSCI India index trades at a trailing P/E of 25.1x, compared to 16.4x for MSCI EM and 15.6x for China. However, Elara points out that valuation extremes are “now behind us,” and attention is shifting to earnings momentum. “India’s return on equity (ROE) remains a key differentiator,” the report added, noting it stands at 15 per cent, almost 50 per cent higher than China’s 10 per cent. Mid-Caps: The Sweet Spot for FII Reentry? Elara’s analysis also spotlights a divergence within market caps. While FII ownership in large-caps and the Nifty 50 has declined, from 28 per cent in December 2020 to 25 per cent in June 2025, mid-cap holdings have held relatively steady, claims the ET report. The brokerage believes this segment is increasingly attractive. “Mid-caps offer the best risk-reward dynamics to play the next better-driven rally,” the report said, pointing to an expected ~23 per cent CAGR in PAT for FY25–27. Strong earnings visibility, coupled with better valuations, positions mid-caps as a potential entry point for returning foreign investors. Consumption Revival And Policy Support May Seal The Deal Another factor bolstering Elara’s optimism is the macro backdrop: GST rate cuts, income tax relief, and expectations from the upcoming pay commission. “The macro backdrop, marked by stability, fiscal discipline, supportive monetary policy, GST reform, income tax cuts, and the anticipated pay commission payouts, provides a solid foundation for earnings to stabilise and improve,” it said in the report. While FY26 growth is expected to remain commodity-led, broader consumption and industrial recovery could drive more balanced earnings by FY27. The firm views the second half of FY26 as pivotal in assessing the sustainability of these trends.
