Foreign Portfolio Investors (FPIs) have extended their selling streak into 2026, withdrawing Rs 7,608 crore from Indian equities in the first two trading sessions of January, following the record Rs 1.66 lakh crore outflow recorded in 2025.

Record 2025 Outflows and Early 2026 Trends

The latest withdrawal continues the unprecedented selling pressure that marked 2025 as the worst year for foreign investment flows since FPIs began investing in India. The comprehensive data reveals the scale of foreign investor withdrawal:

The 2025 outflows were triggered by volatile currency movements, global trade tensions, concerns over potential US tariffs, and stretched market valuations.

Currency Impact and Market Dynamics

The sustained selling pressure has created significant ripple effects across Indian financial markets. The massive FPI outflows contributed significantly to the rupee's nearly 5.00% depreciation against the dollar during 2025, demonstrating the direct correlation between foreign investment flows and currency stability.

Historical January Patterns

Vaqarjaved Khan, Senior Fundamental Analyst at Angel One, noted that the cautious start to 2026 follows historical patterns. Foreign investors have historically remained guarded in January, having withdrawn funds in eight out of the past ten years, making the current trend not entirely unusual.

Expert Outlook for 2026

Despite the challenging start, market experts express optimism for a potential turnaround in FPI sentiment during 2026. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, believes the year is likely to witness a shift in FPI strategy as improving domestic fundamentals may start attracting net foreign inflows.

Khan highlighted that normalisation in India-US trade relations, a benign global interest rate environment, and stability in the USD-INR pair could create a favourable backdrop for foreign investors. He emphasized that equity valuations have become relatively comforting compared to last year, which could further support a revival in inflows.

However, experts caution that FPI flows will likely remain highly sensitive to global cues and macroeconomic developments, with the easing of valuation pressures offering some room for optimism in the months ahead.

Foreign institutional investors have withdrawn nearly ₹2 lakh crore from six major sectors in what represents one of the most significant selloffs in Indian equities. The massive outflows have raised concerns about market sentiment as liquidity shifts toward global markets offering stronger returns.

Sector-wise Outflow Analysis

The damage has been concentrated across key sectors, with technology leading the exodus. The following table shows the major sectoral outflows according to NSDL data:

Beyond these six sectors, selling pressure extended to other segments including realty with outflows of ₹12,364 crore, financial services at ₹10,894 crore, and autos at ₹9,242 crore. Overall, foreign institutional investors have pulled out ₹1.6 lakh crore from Indian equities in 2025.

Global Capital Flow Dynamics

ICICI Securities reported that foreign institutional investors have been net sellers of Indian equities worth US$17.8 billion in 2025, as liquidity flowed into other global equity markets. The research firm noted that Indian markets delivered mediocre returns while global peers posted gains of 12-61% and emerging markets returned around 23%.

Contrary to the broader trend, select sectors attracted foreign inflows:

Market Outlook and Expert Perspectives

Amish Shah from Bank of America expressed optimism about potential reversal in outflows. He cited three key factors supporting his view: expected Nifty returns of around 12% versus just 4% for the S&P 500, anticipated 75 basis points of US Federal Reserve rate cuts, and likely US dollar depreciation. Shah noted that historically, Fed rate cuts have driven emerging market inflows.

ICICI Securities highlighted that foreign institutional investors invested US$7.1 billion in IPOs during 2025, representing approximately 40% of proceeds they sold in secondary markets. Meanwhile, domestic mutual funds witnessed strong SIP inflows of ₹3.2 lakh crore in 2025, though these flows were largely directed toward large-cap stocks and IPOs.

Valuation Concerns and Future Positioning

Nomura maintained a cautious stance on inflow prospects, stating that market valuation at 20.7x one-year forward earnings remains close to recent peaks. The brokerage noted that earnings growth of 10-15% is not compelling, though acknowledged that sentiment could improve as India's relative valuation versus global peers has normalized to historical averages.

Axis Securities projected a more constructive environment for 2026, expecting a transition from valuation-led consolidation to an earnings-led market. The brokerage recommended a "buy on dips" strategy across five themes: financials benefiting from credit expansion, domestic consumption plays, selective cyclicals, healthcare as defensive play, and diversified exposure across market capitalizations.

Sector-specific Investment Opportunities

ICICI Securities identified specific opportunities including PSU banks, citing revival of credit growth, strong asset quality and valuations at historical means. The firm suggested IT stocks deserve reconsideration after recent corrections, noting that valuations have reached floor levels and growth is expected to bounce back. Capital goods and real estate were also highlighted, with the latter having potential to triple over the next five years according to their analysis.