Foreign Investors Exit Indian Equities in Record Numbers in 2025, Flows Seen Turning Positive in 2026

Record Equity Outflows Mark 2025​

Foreign portfolio investors exited Indian equity markets in 2025 at an unprecedented scale, withdrawing a record Rs 1.6 lakh crore, equivalent to about USD 18 billion. The sharp outflows were driven by volatile currency movements, global trade tensions including concerns over potential US tariffs, and elevated market valuations that weakened risk appetite.

Rising US bond yields, a stronger dollar, and persistent geopolitical uncertainties also prompted global capital to shift towards developed markets, moving away from emerging economies such as India.

Despite the severity of the sell-off, market participants expect the trend to reverse in 2026 as global and domestic conditions improve.

Global and Domestic Triggers for a Potential Reversal​

According to Garima Kapoor of Elara Securities India, foreign portfolio investors are expected to return sustainably as nominal growth and earnings improve in calendar year 2026. The possible closure of a trade deal with the US could narrow tariff differentials, while anticipated rate cuts by the US Federal Reserve may keep the dollar soft, supporting emerging market assets.

Domestic factors are also expected to play a critical role. Vikas Gupta of OmniScience Capital highlighted that stronger earnings growth relative to peers, policy continuity, and reforms, particularly around the Union Budget, could act as key triggers for renewed inflows.

However, uncertainty on the global macroeconomic front is expected to continue influencing investor behaviour.

Interest Rates and Currency Movements Remain Key Risks​

Himanshu Srivastava of Morningstar Investment Research India said that the trajectory of global interest rates, especially the timing and pace of rate cuts, along with developments on tariffs, will remain crucial drivers. A moderation in US bond yields and a softer dollar could further support a revival in equity inflows.

As of December 26, foreign portfolio investors had withdrawn Rs 1.58 lakh crore from Indian equity markets, while investing more than Rs 59,000 crore in the debt market, according to depository data.

Worst Year on Record for Equity Flows​

The year 2025 has emerged as the worst on record for equity flows, surpassing the previous high outflow of Rs 1.21 lakh crore in 2022. This followed a marginal net inflow of just Rs 427 crore in 2024, while 2023 had recorded strong equity investments of Rs 1.71 lakh crore.

Analysts attribute the weak performance to a combination of global and local pressures.

Persistently high US interest rates and elevated bond yields improved risk-free returns in developed markets, prompting capital rotation and strengthening the dollar. This tightened financial conditions for emerging markets. Periods of rupee depreciation further reduced dollar-based returns and increased hedging costs, weighing on India’s risk-adjusted appeal. These pressures were compounded by geopolitical concerns related to energy prices, supply-chain disruptions, and trade tensions.

Domestic Valuations and Monthly Volatility​

On the domestic front, elevated valuations in certain segments led to tactical profit-taking. Sorbh Gupta of Bajaj Finserv Asset Management noted that these moves reflected short-term adjustments rather than a reassessment of India’s long-term growth outlook.

The monthly flow pattern highlighted this volatility. FPIs sold equities in eight out of the 12 months in 2025, with net buying limited to April, May, June, and October.

The equity sell-off was partly offset by strong buying from domestic institutional investors, supported by rising systematic investment plan inflows from retail participants.

Strong Preference for Debt Investments​

In contrast to equities, FPIs showed a clear preference for debt in 2025, investing a net Rs 59,000 crore. This was driven by India’s inclusion in global bond indices, attractive yield differentials, and portfolio rebalancing amid volatile equity markets.

The phased inclusion of Indian government bonds under the Fully Accessible Route in indices such as the JP Morgan Global Emerging Markets Index created steady demand from passive funds.

According to OmniScience Capital, FPIs likely booked gains in equities and rotated part of the capital into debt under the Fully Accessible Route to lock in relatively higher interest rates, particularly in the context of an expected rate-cutting cycle.

Sectoral Trends Reflect Shifting Preferences​

Sectoral trends mirrored these shifts in allocation. Financial services and information technology recorded the heaviest outflows amid concerns over US growth, a weak capital expenditure cycle, and pressure on net interest margins. In contrast, healthcare, utilities, and manufacturing attracted inflows, supported by long-term themes such as infrastructure expansion and the production-linked incentive driven manufacturing push.

A Volatile Start and Uneven Recovery​

Foreign investors began 2025 on a weak note, withdrawing more than Rs 78,000 crore in January amid rupee depreciation, rising US bond yields, and expectations of a subdued earnings season. The sell-off continued through March, with total outflows of Rs 1.16 lakh crore in the first quarter as global trade tensions escalated.

Although FPIs returned with net investments of Rs 38,600 crore between April and June, the recovery was short-lived. Selling resumed from July through September, followed by a brief return in October with net investments of Rs 14,610 crore. Foreign investors again turned net sellers in November and December amid weak global cues.

Overall, while 2025 marked a historic exit by foreign investors from Indian equities, market participants remain optimistic that improving growth prospects and supportive global conditions could set the stage for a sustained turnaround in 2026.