Foreign institutional investors have maintained persistent selling pressure on Indian equities, with total FII selling reaching ₹2.25 lakh crore in 2026 so far, according to latest data from Zee News. Total FII selling stood at ₹32,963 crore up to May 30, with the trend visible even before the Iran war crisis. The current Middle East crisis is particularly negative for India due to its dependency on imported energy, while the Indian rupee has seen further slide from its already underperforming position even before this crisis. However, the rupee has shown recent stability, closing at ₹95 to the dollar on Friday after depreciating from about ₹90 to the dollar at the beginning of the year.
FIIs feel that Indian bourses have high valuations relative to earnings growth, high valuations relative to other EMs and growth, which has become more cyclical in many ways than it is secular. As reported by CNI InfoXchange, while acknowledging that the baseline growth is higher than in other EMs, including China, the cyclicality in this economy seems to have increased. The research indicates that forward valuations (Nifty P/E ~19.5x) already discount much good news, making headline risk the dominant alpha driver over fundamentals. Poor earnings growth in India, much superior earnings growth in countries like the US, Japan, South Korea and Taiwan and the strong AI-related trade in these countries, particularly in South Korea and Taiwan, contributed significantly to the FII selling in India and moving money to these markets, according to Dr VK Vijayakumar from Geojit Investments Ltd.
Market experts are warning of significant challenges ahead as Zerodha's Nithin Kamath predicts a 'terrible year ahead' amid mounting inflation concerns. According to Live Mint, the RBI has largely maintained a cautious monetary policy stance over the past year as it balanced inflation concerns against slowing global growth and domestic demand conditions. However, persistently high food and fuel inflation could complicate the central bank's policy outlook in the coming months. Higher interest rates generally increase borrowing costs for businesses and consumers, impacting sectors such as housing, automobiles and capital expenditure.
According to CNI InfoXchange, India's equity narrative through 2028 will be a classic domestic strength vs global friction battle, with GDP growth holding at 6.5-7.2% on capex cycle momentum. However, the Nifty's 12-15% CAGR hinges on navigating oil shocks, Fed-BoJ divergence, and monsoon roulette. P. Krishnan from Spark Asia Impact Managers emphasizes that 'India is not entitled to flows' and that FIIs have no reason to be impressed with buying support from domestic retail investors, noting they have seen similar scripts play out elsewhere without good fundamentals. Looking ahead, institutional flows in the coming month are likely to remain sensitive to developments around US–Iran tensions, oil-price trajectories and RBI monetary policy outcome and progress of the monsoon, said market experts.
Despite FII selling pressure and inflation concerns, there are still opportunities in the market according to market experts. Domestic cyclicals continue to outperform while global-facing sectors remain under pressure due to crude oil volatility and rupee weakness. As reported by Choice Broking, Banking & Financials continue to stand out as one of the market's strongest leadership sectors, with both PSU and private banks witnessing sustained institutional accumulation. Dr. V K Vijayakumar from Geojit Investments notes that FIIs are buying in SMIDs (small and mid-cap stocks) where growth and earnings prospects are good, with earnings being the primary priority for foreign investors. Another major factor responsible for the FII selling has been the steady depreciation in rupee, but the sharp decline in Brent crude to USD 92 contributed significantly to the stability in the rupee, which can restrain the FII flight from India.
