Global risk sentiment improved on Monday after reports indicated progress toward a potential diplomatic breakthrough between the United States and Iran, easing concerns over geopolitical tensions and supporting expectations of softer crude oil prices. The development boosted the Indian rupee, which strengthened to Rs 94.68 against the US dollar at market open, its strongest level since May 8, compared with Rs 95.11 in the previous session.

The rupee's appreciation has sparked discussions on whether improved currency stability and easing geopolitical risks could help reverse the ongoing foreign institutional investor (FII) outflows from Indian markets. Market participants, however, believe the outlook remains mixed.

According to Kotak AMC Managing Director Nilesh Shah, a stable rupee can support foreign investor sentiment as lower currency depreciation improves dollar-adjusted returns for overseas investors. However, he emphasized that currency movements are only one factor influencing FII flows, alongside global liquidity conditions, relative market valuations, geopolitical stability, and domestic macroeconomic fundamentals.

Shah noted that FII flows have remained mixed in 2026, with significant selling earlier in the year driven by geopolitical concerns and rupee weakness. However, selective buying has emerged in sectors such as capital goods, metals, power, and certain small- and mid-cap stocks. He added that a sustained decline in oil prices and further geopolitical easing could encourage broader inflows.

SBI Securities' Sunny Agarwal said that expectations of further rupee appreciation toward the Rs 90–93 range over the next three to six months could provide a dual benefit to foreign investors through both equity gains and currency appreciation. He added that currency stability reduces uncertainty around investment returns and can improve investor confidence.

Agarwal also highlighted signs of global capital rotation, noting that heavily crowded artificial intelligence-related trades are beginning to unwind. He pointed to substantial foreign outflows from markets such as South Korea and Taiwan, suggesting that global investors may increasingly look for alternative opportunities.

Aditya Birla Sun Life AMC Managing Director and CEO A. Balasubramanian said that currency stabilization, easing geopolitical concerns, and recent measures aimed at supporting foreign currency deposits could strengthen India's forex reserves and improve liquidity conditions. According to him, reduced currency-related uncertainty combined with more reasonable market valuations could support a recovery in FII inflows during the year.

However, not all experts expect a strong return of foreign money into equities. Ionic Wealth's Harsh Gupta argued that the current environment may be more supportive for debt markets than equities. He noted that foreign investors are showing stronger interest in Indian fixed-income assets, particularly government bonds, where foreign ownership remains relatively low and leaves room for additional inflows.

Gupta also highlighted the growing importance of domestic liquidity in Indian markets. Monthly systematic investment plan (SIP) inflows of around Rs 30,000 crore have created a consistent demand base, reducing the influence of foreign flows on overall market direction.

He further noted that supply constraints and evolving investment strategies are changing the nature of FII participation. According to Gupta, a significant portion of foreign institutional activity now involves derivative positioning, factor-based allocation, and index-related adjustments rather than traditional long-term equity investments.