Foreign investors have notably scaled back their investments in Indian equities in 2025, withdrawing nearly Rs 2 lakh crore from six major sectors. This trend represents one of the most significant sell-offs in recent times and raises questions about whether this pressure will ease as the year draws to a close or persist into 2026. Data from the National Securities Depository Ltd (NSDL) indicates that foreign institutional investors (FIIs) have withdrawn Rs 1.6 lakh crore from Indian equities this year, showcasing a marked shift in risk appetite after a period of steady inflows.
Sector-Specific Withdrawals
The IT sector has been the most affected, experiencing outflows of Rs 79,155 crore. The fast-moving consumer goods (FMCG) sector followed with Rs 32,361 crore in withdrawals, while the power sector recorded exits of Rs 25,887 crore. Additional impacts were seen in healthcare with Rs 24,324 crore withdrawn, consumer durables at Rs 21,567 crore, and consumer services at Rs 19,914 crore. This widespread retreat highlights the severity of the situation. According to ICICI Securities, FIIs have been net sellers of Indian equities amounting to US$17.8 billion in 2025 as these funds have redirected their focus toward other global markets including China, Japan, Europe, and the United States. The brokerage pointed out that while Indian markets have provided modest returns, global counterparts have seen gains between 12% to 61%, with emerging markets yielding about 23%. Additionally, real estate stocks faced outflows of Rs 12,364 crore, financial services accounted for Rs 10,894 crore in exits, and the automobile sector saw Rs 9,242 crore withdrawn. In contrast, few sectors managed to attract foreign inflows, with telecom leading at Rs 47,109 crore, followed by oil and gas at Rs 9,076 crore and services at Rs 8,112 crore.
Potential for Reversal in Foreign Flows
Despite the notable outflows, certain market strategists suggest that the peak of foreign selling may be coming to an end. Amish Shah, head of India research at Bank of America, indicated that a reversal in flows is plausible, though it might take time for inflows to materialize. He identified three potential catalysts for this reversal: the expected Nifty returns of around 12%, compared to 4% for the S&P 500, the possibility of 75 basis points in rate cuts by the US Federal Reserve, and a potential weakening of the US dollar, which has historically bolstered allocations to emerging markets. Furthermore, the surge in initial public offering (IPO) activity has influenced secondary market flows. ICICI Securities reported that FIIs invested US$7.1 billion in IPOs in 2025, making up about 40% of the proceeds from their secondary market sales. Meanwhile, domestic mutual funds have continued to experience robust systematic investment plan (SIP) inflows of Rs 3.2 lakh crore this year, although much of this capital has been directed towards large-cap stocks and new listings, leaving broader segments susceptible to sharper corrections.
Market Outlook for 2026
Global brokerages have varying perspectives on the outlook for foreign institutional investment in 2026. Morgan Stanley noted that FII positioning is nearing cyclical lows but warned that sustained buying would depend on a recovery in growth, a cooling of equity markets elsewhere, or an increase in corporate issuances. Conversely, Nomura expressed a more cautious outlook, indicating that it does not foresee a surge in FII flows, as current market valuations at 20.7 times one-year forward earnings are close to recent peaks, with earnings growth of 10-15% proving not particularly compelling. However, sentiment may see a modest improvement as India’s valuation premium relative to global peers realigns with historical averages. Looking ahead, Axis Securities anticipates more favorable conditions for Indian equities in 2026, with a shift from valuation-led consolidation to an earnings-driven market. The firm suggests a ‘buy on dips’ strategy with a long-term perspective, favoring financials, domestic consumption, selective cyclicals, healthcare, and diversified exposure across market capitalizations. ICICI Securities highlighted public sector banks as having an attractive risk-reward profile, noting a revival in credit growth and robust asset quality. They also believe that IT stocks may deserve renewed attention following recent corrections, predicting a recovery in growth for the upcoming year. Meanwhile, Jefferies maintained an overweight stance on financials, telecom, autos, real estate, cement, and utilities, while remaining underweight on IT, consumer staples, industrials, and healthcare.
Digihunt is not a financial advisor and this is not investment advice.