India's appeal as the world's fastest-growing economy is facing its most severe test as foreign portfolio investors have sold Indian equities worth ₹2.9 lakh crore year-to-date through June 12, 2026, according to NSDL data. This represents a record exodus of foreign investors from the country, driven by India's growing reputation as an anti-artificial intelligence trade and the economic strain of prolonged Middle East conflict. While India has attracted gross capital of over $90 billion on a 12-month trailing basis ending January 2026, up 13% year on year, this was eclipsed by higher repatriation of capital by foreign firms and rise in overseas investment by Indian companies, taking net FDI to a near all-time low. As per Oxford Economics lead economist Alexandra Hermann Prasad, "India is no longer the obvious, one-way growth story investors assumed it was a few years ago," despite the economy remaining strong by global standards.
Despite heavy FPI outflows, Indian markets have demonstrated remarkable resilience with domestic investors now serving as the primary market counterweight. According to Mint analysis, in 2022, despite heavy FPI outflows of over ₹1.2 lakh crore, the Nifty 100 generated a positive return of 4.9%, while in 2025, FPI selling of about ₹1.64 lakh crore did not prevent the Nifty 100 from gaining over 10%. As per Abhishek Kumar, SEBI RIA from SahajMoney, "With increase in financialisation of household savings the Indian equity markets have structurally outgrown their dependence on foreign capital." The structural shift means that even larger FPI flows account for less than 0.5% of total market cap, compared to nearly 2% a decade ago. Domestic institutions have become a powerful counterweight, with SIP-driven mutual fund flows, insurance and pension money making DIIs a powerful counterweight as domestic institutions bought more than four times what FPIs sold, absorbing the shock almost entirely.
Market veteran Samir Arora challenges the conventional wisdom that foreign investors are selling India due to high valuations, arguing instead that FPI holdings have declined from around $1 trillion to roughly $800 billion, with only $60 billion entirely withdrawn while the rest represents portfolio reallocation and market movements. According to Arora, top Indian companies are currently trading at or near their five- or ten-year lows, yet foreign investors continue selling. He points to significant increases in foreign ownership of new-age companies, with FPI ownership in Eternal rising from 10.4% in 2022 to 30.8% in 2026, HDFC AMC foreign shareholding increasing from 10.4% to 24.5%, and GE Vernova seeing FPI ownership climb from just 0.3% to 20.4% during the same period. As per Arora, foreign investors are reducing exposure to slower-growth businesses and reallocating capital towards new opportunities, suggesting the selling is driven by strategic portfolio rebalancing rather than valuation concerns.
The Modi government's recent handling of the Indian economy is facing significant criticism as the Reserve Bank raised its inflation forecast to 5.1% for the financial year ending March 2027 and warned that the economy is likely to grow at a slower rate of 6.6%, down from a forecast of 6.9% earlier. According to CSIS data, the government has finalized only 2 out of 30 reforms across two years in Modi's third term, a much slower pace than in his first or second terms. As per Richard Rossow from CSIS, "Land acquisition processes and legal remediation of disputes have not measurably improved," while labor regulations improved only marginally and access to reliable, reasonably priced electricity and water remain core challenges. Global equity research firm Bernstein warned in an open letter to Modi that AI advancements threaten quality jobs in India's information technology sector, potentially impacting domestic consumption.
The Indian rupee has come under significant strain during this period, with the year-to-date rupee falling 6%, hitting an all-time low of near ₹97 on May 20 before the RBI intervened aggressively via state-run banks. According to Livemint, the rupee's weakness directly impacts dollar-denominated returns for foreign investors, making currency stability a critical variable. India's forex reserves stood at $682.3 billion as of June 5, adequate to provide import cover for about 11 months. The major reasons behind this selloff have been the mismatch between earnings growth and valuations, the lack of AI play, strength in the US dollar and bond yields, the Middle East conflict, and the rupee's weakness. Despite the Federal Reserve cutting rates three times since late 2025, bringing the federal funds rate to 3.5–3.75%, long-end US yields remain stubbornly high with the 10-year treasury hovering around 4.56%.
The primary engine firing up this economic turnaround has been an unprecedented surge in public capital expenditure. According to Zee News, government infrastructure spending has witnessed a staggering six-fold jump, expanding from roughly ₹2 lakh crore in FY15 to a budgeted ₹12.2 lakh crore for FY27. This has pulled effective capital spending from a pre-pandemic average of 2.7% of GDP to around 4%. Roads, railways, ports, and waterways now absorb more than half of this massive outlay, with key achievements including 99.6% electrification of the nation's Broad Gauge railway network and metro services expanding to 26 cities. The government has successfully walked the fiscal deficit down from its pandemic-era highs of over 9% of GDP to 4.4% in FY26, with a target of 4.3% set for FY27.
