Rupee stabilisation, better earnings growth to bring FIIs back to Indian markets

After a protracted exodus, analysts are now flagging key inflection points that could trigger a significant reversal in foreign institutional investor (FII) sentiment towards Indian equities. May 2026 alone has seen FII selling hit Rs 30,374 crore, pushing the year-to-date outflows to a staggering Rs 1.5 lakh crore, driven by a stronger dollar and elevated global interest rates earlier in the year. The tide, however, appears to be turning. The Indian Rupee, after months of volatility, has shown impressive resilience, stabilizing around the 83.5-83.8 mark against the US Dollar thanks to strategic interventions by the Reserve Bank of India. Crucially, corporate earnings for Q1 2026 have surprised on the upside, particularly in rate-sensitive sectors like financials and infrastructure, fueling upward revisions in full-year growth forecasts and making India's growth story compelling once again in a world bracing for potential US Fed rate cuts later in the year. Investors are now closely watching the monsoon progress and the RBI upcoming Monetary Policy Committee meeting for cues on domestic inflation. Should global liquidity improve and domestic earnings momentum sustain, analysts anticipate a powerful re-rating for Indian benchmarks like the Nifty 50 and Sensex, potentially drawing FIIs back with force in the latter half of 2026 and alleviating pressure on the Rupee. The next few weeks will be critical in confirming this narrative shift.