Every second FII dollar now chasing financial stocks: Should you join the stampede?

Dalal Street just found its new heartthrob and it wears a banker’s suit. Foreign institutional investors (FIIs) have poured a staggering Rs 23,000 crore into financial stocks in the second fortnight of April alone, accounting for nearly 60% of their total equity inflows of about Rs 38,000 crore during the period. So every second FII dollar is now betting on India’s banks and other financial institutions.

The sudden pivot is striking, especially considering the sector saw net outflows of Rs 4,501 crore in the first fortnight of April. But the tide has turned fast and hard.

Other sectors aren’t basking in similar love. FIIs dumped Rs 1,385 crore worth of IT stocks, extending their Q1 exodus from tech (Rs 13,828 crore in April 1–15). Auto and metals too continued to bleed, with net FII outflows of Rs 645 crore and Rs 574 crore respectively in the April 16–30 period.

Besides financials, FIIs were also seen chasing capital goods (Rs 2,944 crore), telecom (Rs 2,511 crore), oil & gas (Rs 2,401 crore) and FMCG (Rs 2,330 crore).


The renewed FII interest in financials comes just as Q4 results from banks pour in. Large private banks have reported improved margins and stable asset quality, while PSU lenders posted mildly weaker NIMs but steady credit books. Motilal Oswal notes that earnings growth is expected to bottom out in 1HFY26, with credit costs likely to improve as stress in unsecured lending eases.

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Motilal Oswal data shows the BFSI sector's share in FII portfolios has jumped 300 basis points QoQ to 34.4% in Nifty500 as of March 2025, significantly above its index weight of 30.2%. That’s a 420bp overweight position, underscoring just how sharply global investors have turned bullish on Indian lenders.

Green Portfolio's Divam Sharma said the renewed FII interest suggests optimism about India’s macroeconomic trajectory, especially with expectations of 6.5%+ GDP growth in FY26.

"After a period of consolidation and underperformance compared to other sectors like IT or capital goods, many financial stocks especially large private and select PSU banks were trading at reasonable valuations relative to their growth potential," he said.

Besides, financials make up over 30% of Nifty50, so any broader market inflows especially from ETFs or index funds tend to disproportionately benefit this sector.

“Our prognosis for large banks is that of benign margin expansion or, at the very least, stability in 2HFY26 after a shallow bottom in 1HFY26,” said Santanu Chakrabarti of BNP Paribas. “We expect reasonable credit growth to translate into concurrent earnings growth momentum – a key catalyst for re-ratings.”

Not all players in the financial pack are shining equally. While large private banks impressed in Q4, smaller and mid-tier banks reported only modest progress, with some still under pressure on the asset quality front.

So, should retail investors chase the rally?

Vinay Paharia, CIO at PGIM India MF, urges selective optimism. “Financials are maintaining growth, but the possibility of some margin pressures cannot be ruled out,” he said. While macro concerns linger — consumption has slowed, and the global tariff tango threatens to clip trade-led growth — he remains bullish on India’s broader story, especially financialization and digital expansion.

Meanwhile, headwinds remain strong for sectors outside BFSI. IT faces the twin whammy of weak guidance and rupee strength. According to Kotak Institutional Equities, the INR has appreciated 4% against the USD over three months, with some IT firms — notably Persistent, Mphasis, and Wipro — vulnerable to earnings downgrades due to unhedged FX exposure.

Between large private sector banks and PSU banks, large private sector banks remain the preferred choice for most long-term investors, though PSU banks are gaining tactical favor in the current environment, Green Portfolio's Sharma said.

"Private banks' earnings are projected to grow at ~11.7%/18.8% over FY26/27, compared to just 7.1%/11.7% for PSU banks. Private banks have doubled their credit market share to 43% in FY25 from 21% in FY14, driven by retail lending, digital capabilities, and customer-centric services," the PMS fund manager said.

The verdict? The FII stampede into financials isn’t without reason. Margins are holding up, credit demand is steady, and the outlook for FY26 looks solid — particularly for the big boys in banking. But chasing this rally blind could be risky. The smarter play might be to follow the money, but keep an eye on the margins.

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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)