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In this report, we analyze FII flows across sectors in the Indian markets during Aug’26 and CY26YTD and evaluate their broader sectoral stance over the year.

* The Indian market remained under pressure amid persistent global headwinds, including renewed tensions in West Asia and elevated crude oil prices. At the same time, heightened geopolitical uncertainties, and persistent inflation concerns, have pushed developed-market bond yields to multi-year highs. This has raised concerns over tighter global financial conditions and the possibility of the US Federal Reserve maintaining a restrictive policy stance for longer.

* Despite the challenging global backdrop, FII flows remained positive for the second consecutive month, adding to robust and sustained DII inflows and providing further support to market liquidity.

* While India’s secondary market performance remained range-bound, buoyant domestic sentiment and supportive liquidity conditions kept primary market activity vibrant, with strong investor appetite continuing to drive a steady pipeline of IPOs, FPOs, QIPs, and block deals. This robust fundraising activity not only reflects healthy investor confidence, but has also absorbed some incremental liquidity that could otherwise have supported the secondary market.

* Better-than-expected 1QFY27 corporate earnings, broad-based earnings upgrades, resilient macro fundamentals, moderating valuations, improved liquidity conditions and a stable currency continue to reinforce the strength of India’s investment case across both the primary and secondary markets.

* Rising bond yields, persistent inflation concerns, and growing expectations of higher interest rates globally, along with continued investor interest in the global AI trade, will be key monitorables for a sustained and stronger recovery in FII interest in the Indian markets.

FII flows continue to remain positive for the second consecutive month

* FIIs invested USD2.4b in Aug’26 into Indian markets for the second consecutive month after record selling from Mar’26 to Jun’26, while DII flows remained positive at USD6.1b during the month.

* In Aug’26, FIIs remained most bullish on Financial Services (+USD1.1b), Consumer Services (+USD0.8b), and Healthcare (+USD0.6b), which together accounted for 84% of total inflows during the month. In contrast, they were most bearish on Telecom (-USD0.5b), FMCG (-USD 0.2b), and O&G (-USD0.2b).

* Notably, after several months of sustained selling, FIIs turned buyers in key sectors such as Financials (+USD1.1b), Technology (+USD0.4b), and Automobiles (+USD0.3b), which together account for a material share of index heavyweights. The reversal in flows into these sectors is encouraging, as it suggests that FIIs are beginning to find value in segments that have faced prolonged selling pressure.

* In Aug’26, 12 of the 20 sectors experienced FII inflows vs. net outflows in 14 of the 20 sectors in CY26YTD. Refer to exhibits from 16 onward for sector-wise monthly flows.

CY26YTD: Financials witness the highest FII selling

* In CY26YTD, FIIs have remained net sellers in 14 out of the 20 sectors, with Financial Services (USD10.8b), Automobiles (-USD3.4b), and O&G (-USD3.2b) witnessing the sharpest outflows, while Metals (+USD2.1b), Capital Goods, (+USD1.7b), and Services (+USD1.1b) experienced the highest inflows.

* O&G (-USD3.2b), FMCG (-USD3.2b), and Telecom (-USD3b) reported outflows for all eight months of CY26, while Capital Goods (+USD1.7b), Metals (+USD2.1b), and Services (+USD1.1b) recorded six, six, and five months of inflows, respectively, in CY26YTD. Notably, in CY26YTD, Metals emerged as the most preferred sector among FIIs, while Financials remained the least preferred. This marks a clear shift from CY25, when Telecom was the most preferred sector and Technology remained the least preferred.

Revival in FII flows offers a silver lining amid geopolitical risks

* The recent turnaround in FII flows, along with their broadening participation across sectors, is encouraging and should help improve market sentiment. We expect this gradual revival in foreign investor participation, supported by resilient domestic liquidity, to provide a cushion to Indian equities and limit the risk of a sharp downside.

* With large-cap valuations remaining below their long-term averages and new and established themes emerging across the mid- and small-cap segments, the Indian market offers a broader set of bottom-up investment opportunities, which could encourage FIIs to reconsider their underweight stance.

Metals and Capital Goods remain the favored sectors for FIIs, while the Financials sector remains the most bearish in CY26YTD

* In CY25, Telecom remained the most preferred FII bet, attracting inflows of USD5.5b. In contrast, Technology, FMCG, and Utilities emerged as the most UW sectors, witnessing outflows of USD8.6b, USD4.2b, and USD3b, respectively.

* The three largest sectors, Financial Services, Technology, and FMCG, have seen the sharpest FII outflows since the start of CY25, resulting in meaningful stock corrections and constraining the performance of large-cap indices.

* In CY26YTD, FIIs remain the most bearish on Financial Services, Automobiles, and O&G with outflows of USD10.8b, USD3.4b, and USD3.2b, respectively. In contrast, they were highly bullish on Metals, Capital Goods, and Services, with inflows of USD2.1b, USD1.7b, and USD1.1b, respectively.

* O&G (-USD3.2b), FMCG (-USD3.2b), and Telecom (-USD3b) reported outflows for all eight months of CY26, while Cap. Goods (+USD1.7b), Metals (+USD2.1b), and Services (+USD1.1b) recorded six, six, and five months of inflows, respectively, in CY26YTD.

* Notably, in CY26YTD, Metals emerge as the most preferred sector among FIIs, while Financials remain the least preferred. This marks a clear shift from CY25, when Telecom was the most preferred sector and Technology remained the least preferred.

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