IT and Financial Stocks Face Heavy Pressure as FII Allocations Plummet to Multi-Year Lows

IT and Financial Stocks Face Heavy Pressure as FII Allocations Plummet to Multi-Year Lows​

Foreign institutional investors (FIIs) have significantly reduced their exposure to two of India's largest sectors, with allocations in information technology and financial services hitting lows since 2012. Sustained outflows since the start of 2026, coupled with a broad market correction, have eroded both absolute holdings and sectoral weightings for these critical segments.

FII Allocations to IT Sector Hit Multi-Year Trough​

The allocation of FIIs to the Information Technology (IT) sector stood at 5.6 percent of total equity holdings in May. This figure marks the lowest recorded level in NSDL data available since 2012.

The decline has been substantial, with the IT allocation having fallen 185 basis points since the beginning of 2026 and nearly 500 basis points since January 2025. In value terms, FIIs held approximately $40 billion worth of IT stocks during May. This figure contrasts sharply with the holdings recorded at the start of 2026 ($60 billion) and at the beginning of 2025 ($81 billion).

Financial Stocks See Deepest Decline in 16 Months​

Meanwhile, FII exposure to financial stocks fell to a 16-month low of 29.5 percent in May. This decline represents a reduction of 285 basis points from the start of 2026.

In absolute terms, FII holdings in financial sectors were valued at around $210 billion during the month. This is down from the holdings recorded at the beginning of 2026, which stood at $250 billion.

Sectoral Outflows Drive Major Investment Declines​

The IT and financial sectors collectively accounted for considerable outflows across FII portfolios in 2026. The two sectors contributed nearly $3 billion and $12.2 billion in outflows, respectively, according to fortnightly data from NSDL. This represents nearly 55 percent of the total FII equity outflow of $28 billion observed so far this year.

Headwinds Plagging Tech and Finance Sectors​

Financial stocks are facing mounting headwinds stemming from rising global inflation and surging crude oil prices. These global economic pressures have exacerbated broader domestic concerns within the financial services space.

For the IT sector, pressure is converging from multiple fronts. Lowered revenue growth forecasts continue to weigh on valuations. Furthermore, structural disruptions fueled by artificial intelligence (AI) are threatening traditional outsourcing models, compounded by weak client spending in both the United States and Europe.

Market Experts Point to Index Weighting Risk​

Financial services and IT services hold a significantly higher weight within benchmark indices due to their market capitalization and substantial ownership base by FIIs. Consequently, any broad-based risk reduction or selling activity conducted by FIIs tends to disproportionately impact these sectors, leading to notably high reported outflows when compared to the rest of the market.

Nirav Karkera, Fund Manager at Fisdom PMS and Head of Research, noted that a large share of the elevated selling in financial services is attributable to the sector's strong representation in FII portfolios through strategic allocations and passive, index-linked holdings.

He further stated regarding IT services that the sector is undergoing a sustained derating cycle amid a challenging demand environment driven by a global economic slowdown. This trend is compounded by persistent geopolitical uncertainties and growing concerns over future earnings due to AI-led disruptions on business models.

Total FII Equity Assets Decline Year Over​

At the conclusion of May, FII total equity assets stood at $710 billion. This represents a decrease from the $826 billion held at the close of December 2025. The decline also persists when compared to the portfolio size of $831.49 billion recorded at the end of December 2024.