By Bharath Rajeswaran
Foreign investors are returning to Indian financial stocks, with the sector drawing its biggest fortnightly inflows in 14 months in the second half of June as policy support , lower valuations and expectations of steadier earnings lifted demand.
Foreign portfolio investors bought 146.34 billion rupees ($1.54 billion) of banking stocks over the period, National Securities Depository data released on Tuesday showed.
FPIs turned net buyers of Indian equities in the second half of June, following four months of selling, with overall inflows of 141.09 billion rupees.
The inflows mark a turnaround after record foreign outflows from Indian markets earlier this year, when investors shifted money into artificial intelligence- and chip-related stocks in Taiwan and South Korea.
In June, the Reserve Bank of India extended a subsidised forex swap facility for lenders' overseas borrowings and said banks could lend to non-residents against foreign currency deposits.
Citi Research said the swap could help banks narrow loan-to-deposit gaps, lower new deposit costs and improve margins.
The government also moved to attract foreign capital, scrapping capital gains tax for FPIs and removing the 20% tax on interest income from such investments, effective April 1, 2026.
Banks NSE:BANKNIFTY gained 6.1% in June, leading the Nifty 50's NSE:NIFTY 1.4% rise.
HDFC Bank NSE:HDFCBANK climbed 7.2% after a law-firm review related to the former chairman Atanu Chakraborty's resignation found no contemporaneous evidence supporting the concerns raised.
The lender also appointed former finance secretary Rajiv Kumar as part-time chairman for three years.
"My sense is that the worst of the FPI selling is over and outflows will reduce significantly," said Abhay Laijawala, chief investment officer for India at Lighthouse Canton.
"Meaningful FPI buying in large banks aided by steady earnings outlook could be enough to power Nifty higher after the 2026 underperformance so far."
($1 = 95.3100 Indian rupees)