Foreign Institutional Investors (FIIs) demonstrated selective confidence in Indian equities during Q3FY26, increasing their stakes in four key stocks across banking, pharmaceutical, and power sectors. These strategic investments, ranging from 0.14% to 2.72% stake increases, reflect institutional confidence in asset quality improvement and long-term growth prospects despite mixed short-term price performance.

Banking Sector Leads FII Interest

Canara Bank emerged as the top choice for FII investment, with foreign investors significantly increasing their stake by 2.72% during the quarter. The public sector bank's FII holding rose from 11.89% in September 2025 to 14.61% in December 2025.

Jammu and Kashmir Bank also attracted FII attention, with foreign institutional investors raising their stake by 0.29% from 7.85% to 8.14% during the same period. The regional bank, known for its strong franchise in Jammu & Kashmir and Ladakh, continues expanding its national footprint while maintaining deep local relationships.

Pharmaceutical and Power Sectors Draw Selective Interest

Torrent Pharmaceuticals witnessed a 0.21% increase in FII stake, rising from 15.92% to 16.13% between September and December 2025. The leading pharmaceutical company, with strong presence in branded generics across India, the US, and international markets, focuses on chronic therapies including cardiovascular, CNS, and diabetes treatments.

SJVN, the government-owned power generation company, saw the smallest but notable FII stake increase of 0.14%, with foreign holdings rising from 2.55% to 2.69%. The company, primarily engaged in hydroelectric projects with growing exposure to solar and wind energy, is strategically positioned to benefit from India's clean energy transition.

Investment Pattern Analysis

The FII stake increases across these four stocks demonstrate selective institutional confidence despite mixed daily price performance. While Canara Bank showed marginal gains, the other three stocks experienced daily declines ranging from 1.13% to 2.29%. This suggests FIIs are focusing on long-term fundamentals rather than short-term price movements.

The investment pattern spans diverse sectors - two banking stocks, one pharmaceutical company, and one power generation firm - indicating broad-based confidence in India's economic growth story. FIIs appear particularly attracted to companies with strong market positions, improving asset quality, and exposure to India's structural growth themes including financial inclusion, healthcare, and renewable energy transition.

Foreign institutional investors (FIIs) continue their selling spree in Indian equities, with no signs of a change in stance despite attractive valuations and expectations of healthy Q3 earnings. The persistent outflows reflect ongoing concerns about trade relations and macroeconomic factors affecting investor sentiment.

FII Outflow Trends and Market Impact

FII selling pressure has intensified in the new year, with investors offloading Indian stocks worth over ₹8,400 crore in the cash segment during January. This continues a prolonged selling trend that began in July 2025, marking a sustained period of foreign investor exodus from Indian markets.

According to estimates from Motilal Oswal Financial Services, FIIs recorded the highest-ever equity outflows of $18.8 billion in calendar year 2025. The selling has persisted despite large-cap valuations trading near their long-term averages, traditionally considered attractive entry points for foreign investors.

Trade Deal Concerns and Tariff Implications

Market sentiment remains weak amid renewed concerns over US tariffs and delays in finalizing an India-US trade deal despite multiple rounds of negotiations. The potential implementation of the "Sanctioning of Russia Act of 2025" has raised additional concerns about trade relations between the two countries.

Republican Senator Lindsey Graham claimed on January 7 that Trump had backed the Russia sanctions bill, which could raise US tariffs to at least 500% on countries that purchase Russian oil. Such developments have contributed to uncertainty about India's trade prospects and currency stability.

Expert Views on Q3 Earnings Impact

Market experts remain divided on whether strong Q3 earnings can reverse the FII outflow trend. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, expects Q3 earnings to be positive but believes it may not be sufficient to systematically attract FIIs back to India.

Vijayakumar emphasized the critical importance of trade relations: "The economy badly needs an India-US trade deal. If the trade agreement doesn't happen, that will impact India's macroeconomic stability through a wider trade deficit, a weakening currency, and further capital outflows. The expected higher corporate earnings in FY27 will depend on robust economic growth, which, in turn, requires a trade agreement."

Optimistic Outlook from Market Analysts

Several experts believe improved earnings could lead to a shift in FII sentiment. Shrikant Chouhan, head of equity research at Kotak Securities, suggests that strong earnings growth could attract FII inflows even amid trade deal uncertainties.

Key factors for sustained FII inflows according to Chouhan:

• Improved corporate earnings in India
• Underperformance in US markets
• Decline in bond yields redirecting capital to emerging markets

Ajit Mishra, SVP of Research at Religare Broking, shares a similar optimistic view. He noted that India's valuation premium to emerging markets currently sits below its historical average, while relative underperformance over the past year has created potential opportunities for global investors.

Market Positioning and Future Prospects

Mishra highlighted that strong Q3 earnings, particularly from financials, industrials, and consumption sectors, could trigger earnings upgrades and market re-rating. In a selective global capital environment, improving earnings visibility and return ratios may outweigh near-term trade uncertainties and drive incremental FII inflows into India.

The combination of weak earnings growth since mid-2024, premium valuations, US tariff concerns, and currency weakness has contributed to sustained FII selling. However, the current market positioning and valuation adjustments may create conditions for a potential reversal if earnings deliver on expectations.