The Indian stock market witnessed unprecedented institutional activity in 2025, with Foreign Institutional Investors (FIIs) recording their highest-ever annual outflow of ₹1.54 lakh crore while Domestic Institutional Investors (DIIs) provided crucial support with record inflows of ₹7.7 lakh crore. This dramatic shift in institutional behavior marked a historic milestone as domestic ownership of Indian companies surpassed foreign investors for the first time in March, with the gap continuing to widen throughout the year.

Record Foreign Outflows Driven by Multiple Factors

The massive FII exodus represents the highest calendar year selling on record, driven by a combination of factors including slowing economic growth, expensive valuations, and a declining rupee that exacerbated risk-off sentiment among global investors. The selling pressure was particularly intense, with FIIs remaining net sellers in seven months while turning buyers in only five months during 2025.

"Foreign selling in Indian equities can be attributed to global investors preferring other markets on a relative basis," said Sriram Velayudhan, senior vice president, IIFL Capital Services. "Factors like lacklustre earnings, tariff overhang and a weak currency, apart from valuations, kept them away."

Domestic Institutions Emerge as Market Stabilizers

Domestic Institutional Investors, led by pension schemes and mutual funds benefiting from robust retail investor participation, demonstrated remarkable resilience throughout the year. Equity mutual funds alone received net flows of ₹3.22 lakh crore, supporting both secondary market stability and the booming IPO market that raised an unprecedented ₹1.75 lakh crore.

"The unprecedented SIP (systematic investment plan) inflows this year have supported the weak markets despite the aggressive foreign sell-off," noted Velayudhan. The sustained domestic buying helped Indian markets achieve modest gains, with the Sensex advancing 9.70% and Nifty gaining 8.40% to briefly touch all-time highs.

Market Performance and Global Comparison

Despite the positive returns, Indian markets underperformed several Asian and emerging market peers, including China, Brazil, and Taiwan, which gained between 26% and 34% during the same period. "Overall, they remained bearish on India as it was the worst-performing market in Asia," said Siddarth Bhamre, head of research, Asit C Mehta Intermediates.

Outlook for 2026

Market experts anticipate a potential reversal in FII behavior for 2026, with the quantum of selling expected to ease significantly. "Historically, periods of high foreign selling were followed by them turning buyers and the same can't be ruled out in 2026," said Velayudhan. Factors such as a potential India-US trade deal and rupee recovery could catalyze foreign investor returns, though experts expect any buying to be gradual rather than aggressive.

Foreign Portfolio Investors (FPIs) have pulled out a record ₹1.58 lakh crore from Indian equity markets, marking the worst year for equity flows in the country's history. This unprecedented outflow surpasses the previous record of ₹1.21 lakh crore witnessed in 2022 and represents a stark contrast to the robust ₹1.71 lakh crore investment seen in 2023.

Key Factors Behind Record Outflows

The massive selloff has been attributed to multiple global and domestic factors that eroded foreign investor appetite for Indian equities. Rising US bond yields and a stronger dollar improved risk-free returns in developed markets, prompting capital rotation away from emerging markets like India.

Geopolitical uncertainties and concerns over energy prices and supply-chain disruptions have periodically weighed on investor sentiment throughout the year.

Monthly Flow Pattern Reveals Volatility

The year witnessed significant volatility in FPI flows, with foreign investors selling equities in eight of the 12 months. Buying was limited to only four months - April, May, June, and October.

The year began on a weak note with FPIs withdrawing over ₹78,000 crore in January alone due to rupee depreciation, rising US bond yields, and expectations of a tepid earnings season.

Debt Market Sees Strong Inflows

In stark contrast to equity outflows, FPIs invested over ₹59,000 crore in the Indian debt market, driven by India's inclusion in global bond indices and attractive yield differentials. The phased inclusion of Indian government bonds under the Fully Accessible Route (FAR) in indices such as the JP Morgan Global Emerging Markets Index created steady demand from passive funds.

Domestic Investors Provide Cushion

The equity selloff by FPIs was cushioned by strong buying from domestic institutional investors, supported by rising Systematic Investment Plan (SIP) inflows from retail investors. This domestic support has been crucial in maintaining market stability amid persistent foreign outflows.

Outlook for Future

Market participants expect the trend to reverse in the future, with several factors potentially supporting FPI return. Expected Fed rate cuts, improved earnings growth, and policy continuity around the Union Budget could act as key triggers for renewed foreign investment interest in Indian markets.