Foreign institutional investors (FIIs) continue their selling spree in Indian equities, with no signs of a change in stance despite attractive valuations and expectations of healthy Q3 earnings. The persistent outflows reflect ongoing concerns about trade relations and macroeconomic factors affecting investor sentiment.

FII Outflow Trends and Market Impact

FII selling pressure has intensified in the new year, with investors offloading Indian stocks worth over ₹8,400 crore in the cash segment during January. This continues a prolonged selling trend that began in July 2025, marking a sustained period of foreign investor exodus from Indian markets.

According to estimates from Motilal Oswal Financial Services, FIIs recorded the highest-ever equity outflows of $18.8 billion in calendar year 2025. The selling has persisted despite large-cap valuations trading near their long-term averages, traditionally considered attractive entry points for foreign investors.

Trade Deal Concerns and Tariff Implications

Market sentiment remains weak amid renewed concerns over US tariffs and delays in finalizing an India-US trade deal despite multiple rounds of negotiations. The potential implementation of the "Sanctioning of Russia Act of 2025" has raised additional concerns about trade relations between the two countries.

Republican Senator Lindsey Graham claimed on January 7 that Trump had backed the Russia sanctions bill, which could raise US tariffs to at least 500% on countries that purchase Russian oil. Such developments have contributed to uncertainty about India's trade prospects and currency stability.

Expert Views on Q3 Earnings Impact

Market experts remain divided on whether strong Q3 earnings can reverse the FII outflow trend. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, expects Q3 earnings to be positive but believes it may not be sufficient to systematically attract FIIs back to India.

Vijayakumar emphasized the critical importance of trade relations: "The economy badly needs an India-US trade deal. If the trade agreement doesn't happen, that will impact India's macroeconomic stability through a wider trade deficit, a weakening currency, and further capital outflows. The expected higher corporate earnings in FY27 will depend on robust economic growth, which, in turn, requires a trade agreement."

Optimistic Outlook from Market Analysts

Several experts believe improved earnings could lead to a shift in FII sentiment. Shrikant Chouhan, head of equity research at Kotak Securities, suggests that strong earnings growth could attract FII inflows even amid trade deal uncertainties.

Key factors for sustained FII inflows according to Chouhan:

• Improved corporate earnings in India
• Underperformance in US markets
• Decline in bond yields redirecting capital to emerging markets

Ajit Mishra, SVP of Research at Religare Broking, shares a similar optimistic view. He noted that India's valuation premium to emerging markets currently sits below its historical average, while relative underperformance over the past year has created potential opportunities for global investors.

Market Positioning and Future Prospects

Mishra highlighted that strong Q3 earnings, particularly from financials, industrials, and consumption sectors, could trigger earnings upgrades and market re-rating. In a selective global capital environment, improving earnings visibility and return ratios may outweigh near-term trade uncertainties and drive incremental FII inflows into India.

The combination of weak earnings growth since mid-2024, premium valuations, US tariff concerns, and currency weakness has contributed to sustained FII selling. However, the current market positioning and valuation adjustments may create conditions for a potential reversal if earnings deliver on expectations.

Indian equity markets faced significant headwinds on January 8, 2026, as Foreign Institutional Investors (FIIs) continued their selling spree while domestic investors stepped in to provide crucial support. The benchmark Nifty50 declined 264 points to close at 25,877, marking a 1% drop amid concerns over potential US tariffs and persistent foreign outflows.

Institutional Investment Flows

The day's trading activity revealed a clear divergence between foreign and domestic investor sentiment. FIIs were net sellers to the tune of ₹3,367 crore, while DIIs emerged as net buyers worth ₹3,701 crore according to provisional exchange data.

Market Performance and Sectoral Impact

The broader market witnessed more severe declines, with both Nifty Midcap100 and Smallcap100 indices falling 2%, reflecting widespread weakness across market segments. Sectoral performance showed significant variation, with metals bearing the brunt of selling pressure.

According to Siddhartha Khemka, Head of Research at Motilal Oswal Financial Services, the Nifty Metal index emerged as the worst performer, plunging 3.4%. The decline was attributed to falling metal prices and profit booking activities. Oil & gas and PSU Bank indices followed with declines of 2.8% and 2.1% respectively.

Policy Concerns and Market Drivers

Capital goods stocks faced particular pressure, with some declining up to 12% following media reports suggesting the Indian Finance Ministry's plans to scrap a five-year-old restriction on Chinese firms bidding for government contracts. This development triggered concerns about increased competition in the sector.

IT sector shares remained under pressure ahead of Q3 results, with market participants expecting another tepid quarter for the technology sector. Export-oriented companies also faced headwinds after reports that US President Donald Trump supported a bipartisan sanctions bill proposing 500% tariffs on countries continuing business with Russia, including India.

Historical Context and Sector Flows

According to JM Financial's monthly tracker, the last 12 months as of December 2025 showed contrasting trends between primary and secondary markets. While Indian primary markets recorded FII net inflows, secondary markets faced substantial FII net outflows of ₹2,40,800 crore over the same period.

Sectors experiencing the highest outflows included BFSI, FMCG, Pharma, Power, Capital Goods, Auto, and Realty. However, some sectors managed to attract inflows during December 2025:

• Services: ₹3,720 crore inflows
• Metals: ₹3,310 crore inflows
• Oil & Gas: ₹2,590 crore inflows
• IT: ₹1,290 crore inflows

The day's trading session highlighted the ongoing challenges facing Indian equity markets, with foreign investor sentiment remaining cautious amid global uncertainties and policy concerns. Domestic institutional support provided some cushion, though broader market weakness persisted across most sectors and market segments.