Usually, when foreign institutional investment (FII) sentiment turns positive, it invariably triggers a sharp rally in large caps, which in turn has a visible positive impact on the Nifty and Sensex. That has been the established pattern through previous cycles. But this time, this well-entrenched pattern seems to have broken. For the first time in many months, FII flows turned positive in July, with net inflowย of over USD 2 billion. More interestingly, August has witnessed the highest monthly inflowย since September 2024, with flows already exceeding USD 3.2 billion as of August 30th. Yet, the Nifty continues to trade around 8.2 per cent below its all-time high touched in early January 2026, even as small- and mid-cap indices are at or near all-time highs.ย
Beyond the headline number
Clearly, the headline FII flow number is doing much less work than it has done in previous cycles. According to N ArunaGiri, Founder & CEO, TrustLine Holdings, the reason is not far-fetched. “One needs to look beyond the headline number and examine the composition of these flows. That is where the clues lie,” ArunaGiri said
In July, only around USD 0.7 billion came through the secondary market. The remaining USD 1.4 billion+ came through the primary market, largely via QIPs, preferential allotments and IPOs. The pattern has continued in August. More than USD 1.2 billion came through the primary market, while around USD 1.9 billion came through exchanges. So, the actual FII buying through the secondary market over the last two months has been only around USD 2.68 billion in total. Primary market money does not necessarily create a broad-based bid for existing listed stocks – it gets absorbed by promoters, companies, and PE exits.
“But even this does not fully explain the lacklustre performance of the Nifty and Sensex. The added flavour is that FIIs appear to be selectively buying large mid-caps despite elevated valuations, while largely bypassing attractively valued large Financials and IT stocks, which together constitute more than 44 per cent of the Nifty,” he added.
What this means for investors
The key takeaway is that headline FII flows can be misleading. “For a meaningful large-cap rally to materialise, we probably need a much stronger and broader turnaround in secondary-market FII flows, particularly into the index heavyweights. That looks unlikely at this point, though it cannot be ruled out,” said ArunaGiri.
While mid-caps are getting a direct boost from selective FII buying, small-caps appear to be benefiting more from the positive sentimental rub-off arising from the changing texture of FII flows. All in all, it remains party time for small- and mid-caps – though, importantly, on a stock-specific basis and not universally across the board.
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(This article is for informational purposes only and should not be construed as investment, financial, or other advice.)