India-US trade deal: Will FIIs finally return to Indian stock market as deal uncertainty clears? Explained

India-US trade deal: Domestic brokerage MOSL said that with the fog of uncertainty now lifted, multiple positives will accrue, including the reversal of FII outflows.

India-US trade deal: The Indian stock market welcomed the much-awaited India-US trade deal on Tuesday, February 3, as investors are viewing the much-awaited trade agreement not only as a meaningful catalyst for equities and export-oriented sectors, but also as a potential trigger for reviving foreign investor inflows.

Foreign institutional investors (FIIs) have relentlessly sold Indian stocks over the last few months, keeping the upside in check.

“The trade deal is structurally positive for India’s medium-term growth and external stability. Improved market access and tariff certainty are likely to boost exports, support manufacturing investment, and strengthen inflows of foreign direct investment (FDI),” said Axis Securities.

Cheered by the announcement of the trade agreement, the Indian equity markets began the session on a sharp gap-up note. The Nifty 50 started higher at 26,308 and climbed to an intraday peak of 26,341, clocking a swift gain of 1,253 points within minutes of the opening bell. Meanwhile, the BSE Sensex also opened strongly at 85,323 and surged to an early high of 85,871, marking an intraday jump of 4,205 points.

FIIs turn net sellers

FIIs remained net sellers in 2025, with the selling extending into the ongoing calendar year as well.

According to data available on NSDL, FIIs pulled out ₹106,606 crore net from equity markets since early August 2025 (including ₹35962 crore in January), when the US decided to levy an additional 25% tariff on India, raising the effective tariff rate to 50%. For the full year, they pulled out a record ₹166,286 crore.

However, the intensity of selling sharply declined in the first two days of February as FIIs net purchased Indian stocks worth ₹1,906 crore.

Due to FII selling and other factors like earnings slowdown, the Indian stock market has remained in a range over the last 12 months, significantly underperforming other global markets.

The Indo-US trade relations have been strained since April 2024, which has soured the FIIs’ outlook, as India was seen to have limited leverage with the US, said Motilal Oswal Financial Services (MOSL). Consequently, India has significantly underperformed its peers by ~40% over the past year, it said.

In the absence of steady domestic investor inflows, the performance would have taken a deeper hit. Domestic institutional Investors (DIIs) have acted as strong, counter-cyclical, and stable buyers during periods of heavy selling by FIIs in 2025.

According to an MOSL report, DII equity inflows were the highest ever at $90 billion in 2025. “DII flows into equities were the highest ever at $90.1 billion in calendar year 2025 (CY25) versus inflows of $62.9 billion in CY24. With just one year of outflows since CY15, DIIs have invested $255.8 billion cumulatively over the last 10 years (CY16-CY25),” said the brokerage.

Can the India-US trade deal trigger FIIs buying in India?

Market experts believe that improving valuations and rock-solid fundamentals should draw FIIs back to Indian markets in the short term.

“A large chunk of US FII capital will likely shift here, viewing India as the premier strategic play among emerging markets. The current high pessimism? It’ll get trapped in a sharp rally fueled by short covering. DIIs and retail will pile in, amplifying flows from all sides—get ready for the upside!” said Divam Sharma, Co-Founder and Fund Manager at Green Portfolio PMS.

Seema Srivastava, Senior Equity Research Analyst, SMC Global Securities, believes that the new agreement signals policy stability, growth revival, and improved sectoral prospects, which together enhance investor confidence.

“Export-oriented sectors are likely to see valuation rerating, attracting equity inflows, while a stronger rupee outlook could make Indian debt more appealing to bond investors. Overall, the deal reduces geopolitical and trade risks, a key determinant in FPI allocation decisions. While execution risks and global demand conditions remain important variables, the agreement is widely seen as a structural positive that will re-anchor FPIs to India’s growth story,” Srivastava said.

Domestic brokerage MOSL said that with the fog of uncertainty now lifted, multiple positives will accrue, including the reversal of FII outflows.

Dr VK Vijayakumar, Chief Investment Strategist, Geojit Investment, expects large-caps to emerge as the biggest beneficiaries of the FII buying. The rally will be widespread across market caps, but the largecaps which are fairly valued, have the potential to outperform, aided by FII inflows, he said.

The FII favourites in largecaps like the banking leaders, non-banking financials and other bluechips in telecom, capital goods and IT, will surge, he opined.