FII Selloff: Rs 2 Lakh Crore Withdrawn from Six Key Sectors; Will the Outflow Cease by 2026?
Foreign investors have significantly reduced their investments in Indian equities in 2025, withdrawing nearly Rs 2 lakh crore from six major sectors. This trend marks one of the most severe sell-offs in recent years, raising questions about whether the pressure will ease as the year concludes or continue into 2026. Data from the National Securities Depository Ltd (NSDL) indicates that foreign institutional investors (FIIs) have pulled out Rs 1.6 lakh crore from Indian equities this year, reflecting a notable shift in risk appetite following a period of steady inflows.
Sector-Specific Withdrawals
The recent sell-off has predominantly affected the information technology sector, which experienced outflows of Rs 79,155 crore. Following closely behind, the fast-moving consumer goods (FMCG) sector saw withdrawals of Rs 32,361 crore, while the power sector faced Rs 25,887 crore in exits. Other sectors also felt the impact, with healthcare witnessing Rs 24,324 crore in withdrawals, consumer durables at Rs 21,567 crore, and consumer services at Rs 19,914 crore. This widespread retreat underscores the severity of the situation. According to ICICI Securities, foreign institutional investors have been net sellers of Indian equities to the tune of US$17.8 billion in 2025, as these funds have shifted towards other global markets, including China, Japan, Europe, and the United States. The brokerage noted that while Indian markets have delivered modest returns, global counterparts have seen gains ranging from 12% to 61%, with emerging markets returning approximately 23%. Additionally, real estate stocks faced outflows of Rs 12,364 crore, financial services saw Rs 10,894 crore exit, and the automobile sector recorded Rs 9,242 crore in withdrawals. In contrast, only a few sectors attracted 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 significant outflows, some market strategists believe that the worst of the foreign selling may be nearing its end. Amish Shah, head of India research at Bank of America, suggested that a reversal in flows is possible, although it may take time for inflows to materialize. He highlighted three potential triggers for this reversal: expected Nifty returns of around 12%, compared to 4% for the S&P 500, the possibility of 75 basis points of rate cuts by the US Federal Reserve, and a potential weakening of the US dollar, which has historically supported 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, accounting for about 40% of the proceeds from their secondary market sales. Meanwhile, domestic mutual funds have continued to attract strong 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 vulnerable to sharper corrections.
Market Outlook for 2026
Global brokerages have differing views on the outlook for foreign institutional investment in 2026. Morgan Stanley noted that FII positioning is nearing cyclical lows but cautioned 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 stance, stating that it does not anticipate a surge in FII flows, as current market valuations at 20.7 times one-year forward earnings are close to recent peaks, and earnings growth of 10-15% is not particularly compelling. However, sentiment may improve modestly as India’s valuation premium relative to global peers returns to historical averages. Looking ahead, Axis Securities expects conditions to become more favorable for Indian equities in 2026, transitioning from valuation-led consolidation to an earnings-driven market. The firm recommends 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 offering an attractive risk-reward profile, citing a revival in credit growth and strong asset quality. They also noted that IT stocks may warrant renewed attention following recent corrections, predicting a rebound 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.
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