India and the European Union (EU) finalized a significant free trade agreement on Tuesday, January 27, which has been referred to as the “Mother of all deals.” Prime Minister Narendra Modi and the senior EU leadership presented an ambitious agenda aimed at enhancing trade and defense to strengthen their relationship amid a complex global landscape.
Additionally, the two parties signed two important agreements—one focusing on security and defense cooperation and the other concerning the mobility of Indian professionals to Europe—following Prime Minister Modi’s hosting of EU leaders Ursula von der Leyen and Antonio Costa for summit discussions.
Amidst market volatility, the Nifty 50 demonstrated a rebound, concluding a two-day decline, driven by strong performances in metal stocks, while investor outlook was bolstered by positive updates on the India-EU trade deal.
However, market analysts are observing the trends in Foreign Portfolio Investors (FPI) and Foreign Institutional Investors (FII) and questioning whether FIIs will show greater interest and return to Indian markets if the “Father of all deals (the agreement with the USA)” is successfully concluded.
Prashanth Tapse, Research Analyst, Senior Vice President of Research at Mehta Equities said that while the India–EU FTA is structurally positive, its impact is perceived as more gradual and less decisive in altering near-term global fund flows. As a result, markets continue to anchor expectations around a potential US deal, viewing it as the real catalyst capable of shifting risk appetite and triggering sustained FII inflows.
FPIs have been wary in recent times, as ongoing net selling indicates a combination of global risk aversion, fluctuations in currency, and relatively high valuations in India in comparison to other emerging markets, believes experts.
FPIs have just not persistently engaged in selling, but with the intensity of their sales in January 2026 notably rising, where as of January 23rd, total FPI sales in the equity market for this month reached ₹33,598 crores, according to NSDL. Analysts indicate that this marks the highest monthly selling amount since August 2025.
Key reasons for FPI/FII outflows
Experts indicate that FII sentiment has remained notably weak due to a variety of factors, including ongoing rupee depreciation, uncertainty surrounding the US-India trade agreement, and disappointing Q3 results that fail to suggest any improvement in corporate earnings.
VK Vijayakumar, Chief Investment Strategist at Geojit Investments, highlighted that one significant contributor to the FII selling has been the persistent drop in the rupee, which reached ₹91.96 to the dollar on Friday, January 23rd.
Market participants believe that the postponement of the US-India trade deal will further widen India’s trade and current account deficits, thereby affecting the rupee. Continuous FII selling is anticipated due to this expected rupee depreciation, according to Vijayakumar.
Implications of the India–US trade agreement on FIIs
According to Prashanth Tapse of Research at Mehta Equities, markets appear far more focused on the potential India–US trade agreement than on the India–EU FTA, despite the latter being positioned as the “Mother of all deals.”
From a capital markets perspective, Tapse believes that the US remains India’s most critical strategic and economic partner, influencing export growth, technology transfers, capital flows, and global supply-chain positioning.
“A meaningful deal with the father of this world due to the size of economy so what it has been called as the “Father of all deals” with the US would signal stronger trade integration, supply-chain diversification, and long-term export visibility key variables that FIIs closely track while allocating capital across emerging markets,” said Prashanth.
A credible breakthrough on the India–US front carries greater implications for FII sentiment, earnings visibility in export-oriented sectors, and long-term capital allocation decisions, according to Tapse.
“Historically, sustained market upcycles in India have coincided with consistent FII inflows, which support valuation re-rating, currency stability, and depth in large-cap leadership. Until FIIs see tangible progress on this front, markets may remain range-bound; however, a decisive breakthrough could act as a structural trigger for FIIs to turn net buyers and drive a broader, more durable market rally,” explained Prashanth.
According to VK Vijayakumar, FII confidence in Indian market is to resume two conditions should be fulfilled:One, corporate earnings have to improve; two, the US-India trade deal should happen. While the former is likely in Q4 FY26, there is no clarity at all on the timeline of the latter. This is the biggest uncertainty weighing on the market now.
Are FIIs likely to turn buyers ahead of Budget 2026?
VK Vijayakumar of Geojit Investments said that FIIs are unlikely to turn buyers before the Budget. If the Budget comes up with some pro-FII tax relief, they are likely to turn buyers post Budget. But sustained FII inflows need uptick in corporate earnings and a US-India trade agreement.
“A meaningful FPI return ahead of the Budget is unlikely. In the current global environment, foreign investors are in no rush to redeploy capital. That said, improving India–US relations could support flows towards the latter part of the quarter. More importantly, India’s domestic demand story remains intact, and expanding strategic engagement with the EU should provide incremental support to capital inflows over time,” said Mohit Gulati, CIO and managing partner of ITI Growth Opportunities Fund.
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