FIIs have not given up on India; time and alignment will bring them back, says Gaurav Didwania, Qode Advisors

If one walked into the market today without looking at the index, one would never guess we are at all-time highs. And that, in a strange way, tells you more about the current cycle than the Nifty ever could. What we are living through is not a classic bull run where everything floats. It is a narrow bull market wrapped inside a broad, rolling correction. A handful of high-quality large caps are carrying the headline index, while several parts of the market, especially mid- and small-caps, have already experienced deep corrections.

That’s why this move feels like what many are calling a “rally of disbelief”. The price action is positive, but the experience of the average investor is choppy at best. The market’s leadership keeps shifting every few weeks. Sentiment is fragile. Narratives flip quickly. And the biggest change is structural: domestic investors are now the marginal price‐setters, with mutual fund and SIP flows absorbing FII selling far more comfortably than in the past.

This transition from a foreign-flow-driven market to a domestically owned, earnings-driven market is healthy in the long run, but it creates volatility. All-time highs don’t feel euphoric when half the portfolio is digesting its own corrections.

Contrary to popular views, FIIs haven’t given up on India. They’ve simply given up on India at any price. Over the last two years, India’s premium to other emerging markets has expanded sharply. At the same time, the rupee weakened, global yields were high, and geopolitical risks mounted. FIIs responded rationally: they booked profits and allocated to geographies that looked more beaten down or offered currency stability. So what brings them back? Time and alignment. India doesn’t need to reinvent itself.

It needs valuation sanity, earnings visibility, and a more stable rupee. As earnings catch up, as speculative froth in small caps fades, and as global central banks begin cutting rates, India will again look disproportionately attractive. In fact, we have already started seeing selective foreign interest in industrials, larger financials, and manufacturing plays.

When the cost of capital falls globally and EM risk appetite returns, India will be one of the first ports of call. It always is, because our growth story is one of the few in the world that is both credible and scalable.

The mid- and small-cap universe today is a very different beast from what it was in 2023–24. Several stocks had run far ahead of fundamentals; the correction we saw in 2025 was less a surprise and more a cleansing.

Going into 2026, I remain constructive on the space but with much stronger caveats than before. This is no longer a phase where the index rises because liquidity lifts all boats. It is a dispersive market, where the difference between the top and bottom quartiles of stocks could be dramatic.

Companies with real earnings power, clean governance, and balance-sheet discipline will still deliver compounding returns. But businesses dependent purely on narrative, hope, and operating leverage will find it hard to reclaim their old momentum.

For investors, this means one thing: risk management becomes as important as stock selection. The long-term opportunity is enormous, but the shortcut of blindly riding small-cap euphoria is firmly shut.

The domestic picture entering 2026 is, in fact, quite encouraging. India remains one of the few major economies growing north of 6%. Capacity utilisation is rising, bank balance sheets are clean, and private capex is slowly but steadily coming back. The government’s infrastructure push continues to be a powerful multiplier.

At the same time, we cannot ignore the headwinds. Global trade frictions, tariff uncertainty, and the recent bout of rupee weakness have injected external volatility back into the system.

A sharply weakening currency may help exporters over time, but it complicates inflation management and keeps foreign flows cautious. So 2026 will likely be a tug-of-war: domestic fundamentals pulling the market up, global uncertainty pulling it down.

Investors will need to get used to a market where sentiment can swing sharply, but the underlying economic direction remains stable.

The rupee’s fall this year has raised eyebrows, but I would argue that the RBI’s stance of managing volatility rather than defending a level is the only pragmatic strategy. Attempting to hold an artificial band would waste reserves and invite speculation.

A gradual depreciation in line with inflation differentials is natural for a developing economy. What matters is preventing disorderly moves, and on that front, the RBI has been measured and effective. Yes, the slide has been uncomfortable, but not destabilising.

Investors should think of currency not as a signal of crisis but as a source of volatility that must be priced in and diversified, just like any other macro variable.

Looking through the noise, I see five broad clusters of opportunity.

Across all these, the winners will be companies that combine scale, technology, governance, and capital discipline.

Metals remain a classic cyclical opportunity, powerful on the way up and painful on the way down. India’s own capex cycle does support demand, and the global clean energy transition is structurally positive for copper and aluminium. But the sector will always remain sensitive to China, trade policy, and commodity cycles.

It’s an investable space, but not one to marry. Position sizing and timing matter as much as stock selection.

If there is one message I would give someone who started investing recently, it’s this: Investing is not about predicting markets; it’s about building a system that protects you from your own impulses.

Volatility is normal. Corrections are normal. Underperformance is normal. What is not normal yet essential is having a rule-based discipline that helps you stay consistent even when the market is testing you.

Data-driven frameworks, quant models, and systematic investing are becoming popular not because they guarantee higher returns, but because they reduce behavioural mistakes, which, over a lifetime, matter more than stock picks.

In a world where narratives change daily, the smartest thing you can do is commit to a process and let compounding do its job.