Improved global risk sentiment and signs of easing geopolitical tensions have boosted optimism around foreign institutional investor (FII) flows into India, as the rupee strengthened to its highest level since May 8.

The rupee opened at Rs 94.68 against the US dollar on Monday, compared with Rs 95.11 in the previous session, supported by reports of progress toward a potential diplomatic breakthrough between the United States and Iran. The development has also raised expectations of softer crude oil prices, a positive factor for India's macroeconomic outlook.

Market experts said that while currency stability is supportive for foreign inflows, it is only one of several factors influencing investment decisions.

According to Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company, a stable rupee improves dollar-adjusted returns for foreign investors and enhances the relative attractiveness of Indian assets. However, he emphasized that FII flows are also driven by global liquidity conditions, valuation levels, geopolitical stability, and domestic economic fundamentals.

Shah noted that FII activity has 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 mid-cap and small-cap stocks. A sustained decline in crude oil prices combined with geopolitical relief could encourage broader foreign participation.

Sunny Agarwal of SBI Securities said that expectations of further rupee appreciation toward the Rs 90-93 range over the next three to six months could provide an additional incentive for foreign investors. Currency stability reduces uncertainty around investment returns and protects portfolios from losses caused by exchange-rate depreciation.

He also highlighted signs of capital rotation in global markets, noting that previously dominant artificial intelligence-related investment themes are beginning to lose momentum. Agarwal pointed to substantial foreign outflows from markets such as South Korea and Taiwan, suggesting that investors may be reassessing regional allocations.

A Balasubramanian of Aditya Birla Sun Life AMC said that multiple factors could support FII sentiment, including easing tensions in the Middle East and measures aimed at strengthening India's foreign exchange reserves and liquidity conditions. He added that reduced currency uncertainty, combined with reasonable valuations, could encourage FIIs to increase allocations to Indian equities during the year.

However, not all market participants expect a significant return of foreign money into equities. Harsh Gupta of Ionic Wealth argued that current conditions may be more favourable for debt markets than equities. He noted that foreign investors are showing stronger interest in Indian fixed income securities, particularly government bonds, where foreign ownership remains relatively low at around 3%, leaving room for additional inflows.

Gupta also highlighted the growing influence of domestic investors on Indian markets. Monthly systematic investment plan inflows of approximately Rs 30,000 crore have created a steady demand base, reducing the marginal impact of foreign portfolio flows on market direction.

He further observed that limited equity supply and evolving FII strategies could restrict sustained buying. According to Gupta, foreign investors are increasingly focused on derivative positioning, factor-based allocations, and index rebalancing activities rather than traditional long-term equity investments.