Explained: Why are FIIs selling and when could flows return to stock markets?

Markets are navigating volatility amid global uncertainty, artificial intelligence disruption and continued foreign investor selling.

In separate interactions with Zee Business, Pacific Paradigm & Paradigm ARQ founding partner Punita Kumar Sinha and White Oak Capital Management founder Prashant Khemka shared their views on the outlook for Nifty, Bank Nifty, foreign flows and sector opportunities.

Both experts said markets are adjusting to slower earnings growth and global macro factors, while stock selection remains key in the current phase.

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AI Disruption: Volatility in IT, But Opportunities Emerging

Speaking on the impact of artificial intelligence on markets and the IT sector, Punita Kumar Sinha said AI is a transformational technology that will change business models, job markets and productivity across sectors.

She said most of the benefits so far have accrued to US companies as they started investing earlier. However, she added that India has now realised the importance of AI, and awareness is rising among students and companies.

She noted that AI-related stocks globally, particularly in the US, have seen sharp volatility. “There is a debate on who will be the winners and who will be the losers. Even globally, leading technology stocks have seen sharp corrections,” she said.

On Indian IT companies, she said, there is an ongoing debate on whether their business models will need structural changes. She added that valuations in parts of the Indian IT sector have corrected and are becoming more reasonable. She advised investors to research companies that are adapting and bringing changes to their business models.

Prashant Khemka also described the current phase as one of the most disruptive periods for the IT industry in the past 25–30 years.

“This is a highly disruptive change. Some business segments may collapse, and new opportunities will evolve. The net impact will be known over time,” he said.

He said companies that are nimble and execute well are likely to outperform. He added that his portfolio exposure to large-cap IT companies has reduced over the past six months, while focus remains on better executing players within the sector.

Referring to the deal between Infosys and Anthropic, he said such developments are positive as they reflect new business opportunities emerging in the AI space.

“This is not a situation like newspapers versus the internet, where profits collapsed structurally. There will be losses in some segments, but new segments will also grow,” he said.

Market Direction: Macro and Geopolitics in Focus

With earnings season largely behind and major domestic events such as the Union Budget concluded, experts said markets may now be driven more by global macro trends and geopolitics.

Sinha said interest rate expectations in both the US and India appear stable for now, with no immediate urgency for rate cuts. As a result, she believes markets will respond more to geopolitical developments, including trade negotiations led by US President Donald Trump.

She said currency fluctuations, metals prices and commodities are already reacting to global developments. “Market movements may now be driven more by macro factors than company-specific data in the near term,” she said.

Khemka said a sustained market rally will ultimately depend on corporate earnings growth.

He noted that earnings growth, which was in the high teens or around 20 percent in the immediate post-Covid phase, has moderated to high single digits in the last two financial years.

“There is nothing unusual in this. Historically, earnings growth has not been a straight line. Some years are strong, some are moderate,” he said.

He added that markets do not always move in exact alignment with earnings in the short term but over time, profitability remains the key driver.

FII Selling: Valuations and Relative Performance

Foreign institutional investors (FIIs) have continued to sell Indian equities, though the pace has moderated in recent sessions.

Sinha said one major concern among global investors has been India’s relatively high valuations and perceptions that the country is lagging in technology investments.

She said the government’s push towards data centres and digital infrastructure could improve sentiment. However, she acknowledged that some global investors remain unconvinced and believe India needs to spend more on technology.

“India will need to change that perception if it wants to attract sustained foreign investment,” she said.

Khemka explained that global investors allocate capital across markets based on relative performance and opportunities.

He said India has underperformed some other emerging markets over the past year, leading to portfolio rebalancing. Many global investors who were overweight India are now reducing exposure and increasing allocation to other emerging markets.

He added that emerging markets as a group have recently seen net positive inflows after a long gap. Since India has a significant weight in global emerging market benchmarks, a portion of those flows could return in the coming months.

“It will be important to watch whether positive flows into emerging markets translate into net FII inflows into India,” he said.

Is This the Right Time to Invest?

On whether investors should deploy fresh capital, Sinha said India’s long-term growth story remains intact, supported by higher GDP growth compared to most global peers and favourable demographics.

However, she noted that earnings growth expectations have moderated from 15–20 per cent earlier to 10–15 per cent now. As a result, valuation multiples may also compress compared to previous peaks.

She said investors cannot perfectly time market bottoms and suggested looking at stocks where valuations have corrected meaningfully and growth-to-valuation ratios appear reasonable.

“There is considerable negativity already priced in. Markets are entering relatively attractive zones,” she said.

Khemka also emphasised stock selection over broad top-down calls. He said his team focuses on bottom-up opportunities rather than aggressive sector overweight or underweight positions.

Sectoral Preferences: Financials, Healthcare, Consumption

On sectoral themes, Sinha said export-related sectors such as textiles, which had corrected sharply due to trade-related uncertainty, may be worth examining now as uncertainty eases and valuations offer support.

She identified financials as a core sector for India, including banks, non-banking financial companies, asset managers and brokers. She said if India’s growth continues, credit growth will follow, making financials structurally important.

She also mentioned real estate, particularly in the context of data centre investments, as an area to watch. She added that selective opportunities exist in technology, defence and certain public sector undertakings where valuations have become more reasonable.

Khemka said his portfolio has higher allocation to financials, healthcare and consumer discretionary relative to benchmarks and other emerging markets. He said energy and utilities currently have a lower allocation in his strategy.

View on Gold and Commodities

On commodities, Sinha said she is not a commodities specialist but noted that gold, silver and currencies are heavily influenced by geopolitical developments.

She said long-term demand for metals such as silver and copper remains supported by structural trends and economic growth. However, volatility is likely to remain high as prices react to geopolitical news and currency movements.

She described gold as a portfolio diversifier and geopolitical hedge, suggesting that investors may maintain a core allocation as part of asset diversification.

What Market Experts Said?

Experts indicated that markets are in a transition phase marked by AI disruption, moderated earnings growth and global macro uncertainty.

While volatility may persist in Nifty and Bank Nifty, both Sinha and Khemka stressed that long-term fundamentals of the Indian economy remain supportive. They advised investors to focus on valuations, company execution and sector-specific opportunities rather than attempting to time short-term market swings.