Will Budget bring back FIIs? Morgan Stanley's Ridham Desai expects 3 reforms to revive foreign flows

After $21 billion of relentless selling by foreign institutional investors (FIIs) since the beginning of 2025, India’s equity strategists are increasingly turning to the Union Budget as a potential pivot point. Morgan Stanley’s Ridham Desai, who leads the firm’s India equity strategy team, has identified three specific capital market reforms that could meaningfully reverse the FII outflow narrative that has plagued Indian markets. “There has been growing concern about the negative balance of payments and foreign portfolio investor (FPI) selling. In this context, it is quite possible that the Budget proposes broadening the base of foreign portfolio investors, allowing more pools of capital to access Indian stocks,” Desai said in a Budget strategy note. The two other reforms could focus on simplifying buyback taxation—which currently risks distorting capital structures and hurting long-term capital market flows—and further enhancing tax benefits at GIFT City, he said. As global financial flows increasingly route through international financial centres, GIFT City has emerged as a potential hub but remains underdeveloped compared with peers such as Singapore and Hong Kong. By sharpening tax incentives and strengthening regulatory frameworks, the government could attract more foreign capital into Indian securities through platforms such as the Gateway International Exchange. This would create additional avenues for FII participation, particularly for investors facing regulatory or structural constraints in traditional market-access mechanisms. India has seen around $2 billion in net foreign investor outflows so far this year, following a $19 billion sell-off in 2025. Live Events “It appears the market is expecting modest fiscal consolidation to protect growth, flat to higher capital spending as a percentage of GDP, and some additional tax incentives for manufacturing,” he said, adding that the Budget is likely to focus on deficit reduction, government capital expenditure, the debt calendar, and capital market reforms aimed at boosting foreign inflows. Desai's team maintains an overweight stance on Financials, Consumer Discretionary, and Industrials, which would likely be primary beneficiaries if FII flows return. Sensex track record around Budget Morgan Stanley's analysis indicates that India is tracking lower on both absolute and relative bases heading into the budget. Historically, when equity markets have fallen in the 30 days preceding the Budget announcement, the probability of a post-budget rally increases meaningfully. Historically, the market has fallen on two of three occasions in the 30 days following the budget. The probability of such a fall rises to 75% if the market has risen in the 30 days preceding the budget. Only on three occasions in 32 years has the market been up both before and after the budget, the latest being 2024, Desai said. “This year, India is tracking lower on both an absolute and relative basis, and if it were to hold this performance into the budget day, the chances of a post-budget rally increase,” the global brokerage said. (You can now subscribe to our ETMarkets WhatsApp channel) (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2025, Share Market on Budget 2025 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .) Subscribe to ET Prime and read the Economic Times ePaper Online.and Sensex Today. Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price ...moreless (You can now subscribe to our ETMarkets WhatsApp channel) (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2025, Share Market on Budget 2025 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .) Subscribe to ET Prime and read the Economic Times ePaper Online.and Sensex Today. Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price ...moreless For a future, Hindustan Copper is reviving what it junked in past FOMO or geopolitical safety net: What’s fuelling the gold ETF rush? Generous payouts come back to bite IT firms in the era of AI Scott Adams and the weasel-proof wallet Stock Radar: Coal India stock breaks out from Ascending Triangle range to hit fresh 52-week high in January 2026; time to buy? These mid-cap stocks with ‘Strong Buy’ & ‘Buy’ recos can rally over 25%, according to analysts 1 2 3