Jefferies India: US Fed Rate Hikes Are the Primary Headwind for Foreign Institutional Investor Flows Into Indian Equities

The Quick Take

• Jibi Jacob, Head of ECM India at Jefferies, identifies US Fed rate hikes as the key structural headwind preventing foreign institutional investors from returning to Indian equities
• The higher US risk-free rate makes dollar-denominated Treasuries more attractive versus emerging market equity risk, keeping FII outflows persistent
• A reversal in Fed policy — rate cuts or a clear pivot signal — is the trigger Jefferies believes is needed before FII flows structurally return to India

Jibi Jacob, Jefferies India's Head of Equity Capital Markets, told Business Today that US Federal Reserve rate hikes are the defining structural headwind for foreign institutional investor flows into Indian equities. The argument is a standard carry-and-risk-premium framework: when US risk-free rates are elevated and rising, the opportunity cost of allocating capital to higher-risk emerging market equities — including India — rises proportionally. FII investors, particularly US and European institutional allocators, have been net sellers of Indian equities through the rate hike cycle, and Jefferies' view is that this trend continues until the Fed pivots.

India's domestic equity market has been partially cushioned from FII outflows by robust domestic institutional investor (DII) inflows — including SIP contributions to mutual funds, which have remained strong through the volatility. However, Jefferies' Jacob argues that sustained FII return requires a shift in the global rate environment, not merely India-specific market catalysts. The Indian rupee's trajectory is the secondary variable: a weakening rupee amplifies FII losses on Indian equity positions for dollar-based investors, creating a self-reinforcing deterrent.

The key trigger for FII flow reversal that Jefferies is watching is any Fed pivot signal — whether a pause in hikes, a rate cut, or explicitly dovish forward guidance. In the interim, Indian equities face a structural valuation ceiling imposed by the FII absence, and sectors most dependent on foreign capital (mid-cap IT, new-age tech, IPO candidates) face the greatest pressure. India's own RBI policy response to global tightening is the domestic variable that interacts with this global trigger.

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