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.

Foreign Portfolio Investors (FPIs) withdrew a record Rs 1.60 lakh crore from Indian equities in 2025, marking the largest outflow in history as global headwinds, stretched valuations, and currency volatility dampened investor sentiment. Despite this unprecedented exodus, market participants expect flows to turn sustainably positive in 2026 driven by earnings recovery and policy reforms.

Record Outflows Amid Global Pressures

The massive withdrawal surpassed the previous record outflow of Rs 1.21 lakh crore in 2022, making 2025 the worst year for equity flows. This came after a marginal net inflow of just Rs 427 crore in 2024, contrasting sharply with the robust Rs 1.71 lakh crore equity investment seen in 2023.

Rising US bond yields, a stronger dollar, and geopolitical uncertainties tilted global capital towards developed markets. "Persistently high US interest rates and elevated bond yields improved risk-free returns in developed markets, prompting capital rotation," said Himanshu Srivastava, principal manager-research at Morningstar Investment Research India.

Global Market Performance Disparity

The performance gap between Indian markets and global indices justified FPI investment decisions, with the rupee's depreciation further reducing dollar returns for foreign investors.

Sectoral Flows and Investment Patterns

FPI selling was concentrated in key growth sectors, with financial services and IT experiencing the heaviest outflows amid concerns over US growth and weak capex cycles. The primary sectors experiencing outflows included Information Technology, FMCG, Power, Consumer Durables, and Healthcare. However, healthcare, utilities, and manufacturing attracted inflows based on long-term infrastructure and PLI-led manufacturing themes.

FPIs maintained maximum exposure to the banking, financial services and insurance sector while being only marginal sellers in this space, aligning with its significant market weightage.

Debt Market Preference and FAR Inclusion

In contrast to equity outflows, FPIs invested Rs 59,000 crore in Indian debt markets, 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 in indices such as the JP Morgan Global Emerging Markets Index created steady demand from passive funds.

"FPIs probably booked gains in the equity markets and rotated some of it into the debt FAR to lock-in the relatively higher interest rates," said Vikas Gupta, CEO and chief investment strategist at OmniScience Capital.

2026 Recovery Outlook

Market experts anticipate a sustainable turnaround in FPI flows during 2026. "We expect FPIs to return sustainably in India as nominal growth and earnings pick up. Closure of the trade deal with the US should narrow tariff differentials, while Fed rate cuts will keep the dollar soft, favouring emerging-market assets," said Garima Kapoor, deputy head of research and economist at Elara Securities India.

Domestic factors including Indian earnings growth relative to peers, policy continuity, and reforms around the Union Budget could act as key triggers for revival. The equity sell-off was cushioned by strong domestic institutional investor buying, supported by rising SIP inflows from retail investors who continued channeling liquidity into Flexi cap, Midcap and Small cap funds.