Can the India-US trade breakthrough bring FIIs back to Indian equities

• FIIs turned net buyers of ₹1,906 crore in early February 2026 after persistent selling, signaling a potential shift in sentiment following the trade deal
• India's equity market has underperformed other emerging markets by around 40% over the past year due to geopolitical pressures and domestic headwinds
• Analysts view the trade agreement as a structural positive that reduces policy risks and could re-anchor foreign capital to India's growth story, though execution risks remain

Summary: India-US Trade Deal May Revive Foreign Investment in Indian Equities

A breakthrough in India-US trade negotiations has sparked optimism that foreign institutional investors (FIIs) may return to Indian markets after months of sustained selling. The development is viewed as a sentiment booster that could reverse the trend of foreign capital outflows.

Key Figures and Timeline

FIIs have withdrawn ₹106,606 crore ($12.5 billion) net from Indian equities since early August 2025, when the US imposed additional tariffs raising effective rates to approximately 50%. However, early February 2026 showed a reversal with FIIs becoming net buyers of ₹1,906 crore over the first two trading sessions.

Domestic Support

Domestic institutional investors (DIIs) have been crucial in cushioning market declines, purchasing ₹67,183 crore in January 2026 alone. DII equity inflows reached a record $90.1 billion in 2025, compared to $62.9 billion in 2024, with cumulative investments of $255.8 billion over the past decade.

Market Performance

India has underperformed other emerging markets by approximately 40% over the past year due to trade tensions and domestic headwinds that began in April 2024.

Market Implications

Analysts believe the trade deal reduces geopolitical and trade risks—key factors in FII allocation decisions. The agreement signals policy stability and growth revival, potentially triggering a "sharp rally fueled by short covering." Experts suggest US FII capital may increasingly view India as the premier strategic play among emerging markets, though execution risks and global demand conditions remain important variables. Future focus will center on domestic growth trends, Reserve Bank of India monetary policy, and trade agreement durability.