FPIs Invest Rs 84,291 Crore In November So Far: Are Large Caps Still Better Placed Than Mid And Small Caps?

Foreign portfolio investors (FPIs) have made a strong return to Indian equities, investing Rs 84,291 crore in November so far after two consecutive months of sustained selling. The aggressive buying has lifted benchmark indices, even as global markets faced pressure from rising bond yields, higher crude oil prices and concerns over the returns on artificial intelligence (AI) infrastructure investments.

The change in foreign investor sentiment comes after a volatile October. FPIs sold shares worth nearly Rs 47,955 crore in the first fortnight of October before turning buyers in the second half of the month, when they invested Rs 13,112 crore.

Indian equities also showed resilience against the weakness in global markets in the second half of October and the first half of November. While several overseas markets delivered negative returns, Indian benchmark indices recovered from their lows.

Why Are Large-Cap Stocks Benefiting From FII Buying

Large-cap stocks have taken the lead in the recent recovery after lagging behind mid and small caps for much of the year. The key question is whether continued FII buying will help large caps maintain their lead or whether mid and small caps will catch up.

As of October 15, the Nifty 50 was down nearly 12 per cent on a year-to-date (YTD) basis, while the Nifty 100 had fallen over 10 per cent. The Nifty Smallcap 100, in contrast, had gained around 8 per cent, while the Nifty Midcap 100 was down slightly over 2 per cent.

The trend has changed over the past month. The Nifty 50 has gained nearly 11 per cent, compared with a 4.19 per cent rise in the Nifty Midcap 100 and a 1.55 per cent gain in the Nifty Smallcap 100. This suggests that large caps are leading the recovery, while mid and small caps have seen more modest gains.

"Interestingly, this shift coincided with a reversal in foreign institutional flows and a return of interest to the IT sector, particularly to large-cap IT stocks, where FIIs pumped in over $5 billion during the first ten days of November, providing a significant boost to large-cap stocks. Given their relatively higher ownership and liquidity in large caps, the impact of these flows has been more pronounced in this segment," says Aruna Giri N, founder and CEO of TrustLine Holdings.

According to Vinod Nair, head of research at Geojit Investments, foreign buying has been concentrated in large-cap financial stocks rather than being spread uniformly across the market.

"Foreign investors drove a shift into large-cap financials rather than broad index chasing. IT struggled under a firmer rupee and the prospect of higher-for-longer global rates, while metals also lagged."

Large-cap stocks are easier for foreign investors to buy and sell because they have more trading activity. However, this does not mean large caps will continue to outperform mid and small caps.

"In our view, the current phase of large-cap dominance need not necessarily signal a structural change in market leadership. It could well be a temporary phase driven by the sudden reversal in FII flows," says Aruna Giri.

Can Mid And Small Caps Catch Up

The recent market recovery has not translated into uniform gains across market-cap segments. While large caps have benefited from foreign buying, mid and small caps have lagged in the recent phase.

ArunaGiri expects the broader market to regain momentum, although the recovery may not extend to all stocks. "As the broader market cycle evolves, we expect small and mid-caps to regain momentum and participate more meaningfully in the next phase of the rally, more on a stock-specific basis," he says.

He also cautions investors against treating the recovery in the IT sector as evidence of a structural improvement in its earnings outlook.

"More importantly, IT as a sector is witnessing more of a cyclical bump rather than a structural trend for which more evidence is required on the longer-term earnings visibility."

What Should Investors Watch Now

Several factors will shape the market's direction in the coming weeks, including US Federal Reserve interest rates, crude oil prices, and foreign investor flows.

Nair sees some support for the medium-term market outlook from relatively comfortable large-cap valuations, easing geopolitical concerns and expectations of an earnings recovery. However, he expects near-term consolidation.

"Still, valuation comfort in large caps, easing geopolitical risk, crude's retreat from recent peaks and the prospect of a double-digit earnings recovery keep the medium-term backdrop constructive. Expect near-term consolidation with a cautious lean."

Investors will also track developments in global interest rates, crude oil prices and foreign portfolio flows. The upcoming US retail sales data, Nvidia's earnings and the release of the Federal Open Market Committee (FOMC) minutes could influence global rate expectations and sentiment towards technology stocks.

For domestic markets, investors will also assess the Reserve Bank of India's (RBI) response to changing inflation and growth conditions ahead of its December monetary policy review. Retail inflation rose to 6.09 per cent in October from 5.54 per cent in September, crossing the RBI's upper tolerance limit of 6 per cent for the first time in two years. Food inflation also increased to 8.94 per cent, adding to price pressures.

Nair advises investors to remain selective rather than chase the recent rally. "Investors should stay selective, favouring large-caps with earnings visibility and using dips to accumulate."

Aruna Giri also believes that stock selection will matter more than broad market-cap trends as the recovery progresses.

"Going forward, FII flows will remain an important indicator to track for understanding the near-term market rotation. However, our focus would continue to remain on stock-specific opportunities rather than getting overly influenced by the changing leadership between market-cap segments. The eventual recovery in small and mid-caps is likely to be selective, making valuations and earnings prospects far more important than the broader index movement."