The Indian stock market is feeling a bit like the movie character Amitabh Bachchan usually played in the 1970s: the cop with the system stacked against him, who kept getting beaten up. The economic environment is delivering a one-two punch to Indian stocks, with rising oil prices and inflation, and slow FY26 earnings growth. Compared to risk free US treasury bonds and other emerging markets, Indian stocks have struggled with returns.

The depreciating rupee is adding mirchi to the dal: it has fallen to record lows against the dollar. While Nifty returns have been flat in rupee terms since the start of 2025, the rupee's decline against the dollar has resulted in negative returns for global investors. In comparison, returns have been strong across other Asian markets and the US.

The boom in semi conductor and chip stocks in Taiwan and South Korea have caused a bull market run, boosting returns. Chinese stimulus measures have also driven up China's indices.

Foreign investors have as a result, pulled large sums out of the Indian stock market. While some Indian investors have made the argument that high taxes on stock market returns (STT and LTCG) are the main reason that FIIs are pulling out, the core issue is the weak returns even before taxes.

High valuation markets like India are already  difficult to justify for global investors. While India’s trailing PE has moderated to 20.4, its earnings growth is in the single digits (7.3% for FY26). In comparison, South Korea and Taiwan are seeing double-digit earnings growth, thanks to huge demand for memory chips and semi conductors. Consensus estimates for overall earnings growth of Korea's KOSPI constituents is above 200%(!), helped by heavyweight chipmakers like SK Hynix and Samsung.

Despite the negative Indian sentiment however, FIIs have continued to selectively invest in some stocks. We take a closer look at the stocks where FIIs have increased their stake QoQ.

FIIs make selective buys amid a sea of sells

The shareholding screener for FIIs offers a revealing picture. Among stocks with a market cap of >Rs 1000 crore, FIIs have mainly increased stakes in high beta and niche businesses, such as MCX (+5.43%), Shriram Finance (+8.9%) and Sammann Capital (+21.3%). Sammann Capital (formerly Indiabulls Housing Finance) was for example, a full on restructure of its business, where  Abu Dhabi's sovereign-backed International Holding Company (IHC) officially took over as promoter.

Strong rural lending growth has boosted Shriram Finance's outlook, while KS Smart Tech, a rebrand of Soma Papers & Industries, is a microcap turnaround story, having pivoted into internet of things infrastructure and government contracts.

These buys are individual, high conviction ideas rather than sectoral or index plays. FII investors are making very specific bets.

In the meantime, FIIs have sold traditional financiers and software and services heavily. They rotated out of the big banks, including ICICI Bank (-9.4%), HDFC Bank (-3.6%), Kotak Mahindra Bank (-2.9%), and IndusInd Bank (-3.03%), as well as NBFCs and housing finance firms like Aavas (-7.98%) and Five-Star (-4.5%).

What stocks are both FIIs and MFs buying?

The calculations that FII and MF institutions make are not the same. The steady SIP inflows in the domestic mutual fund market have allowed MFs to keep investing in what they perceive are undervalued stocks and sectors.

In fact, domestic fund managers view FII-driven sell-offs in fundamentally strong companies as attractive entry points for buying. For example, all the stocks that we mentioned FIIs selling heavily in, like banks, saw MF buying QoQ. The India-only focus is another factor, since unlike FIIs, MFs don't have other emerging market and US plays competing for attention.

So there are just three stocks in the > Rs. 1000 crore market cap universe that saw both FIIs and MFs buying stakes QoQ.

These three sweet spot stocks drew investors for very specific reasons. Marksans Pharma has over several quarters, pivoted to high margin medications sold in the US and UK. Low debt, and high FDA approval rates for its formulations have drawn investors to this midcap pharma company.

Natco Pharma, the other big FII+MF buy here, is another pharma play from a different direction. Natco built a big cash pile from years of selling generic Revlimid (a cancer medication) in the US. It is now using this cash to target high value acquisitions across emerging markets, like its recent acquisition of South African player Adcock Ingram, which added Rs 40 crore quarterly in profits to its bottomline.

Finally, hypermarket chain Vishal Mega Mart has seen strong profit growth, as a Tier 2/Tier 3 cities play. It is targeting a very large base of lower middle class consumers, while deploying its capital very efficiently: a rare combination in the retail space.

The logic behind FIIs exiting is pretty clear

Until the picture of global vs India returns becomes less dire, the outflows among FIIs will continue. FIIs will make very targeted buys in the meantime, that have strong cash flows and profit visibility, and turnaround stories. So for now, the Indian stock market story is a domestic story.