India-focused offshore funds and exchange-traded funds witnessed their sharpest quarterly outflows since the Covid-era market turmoil as foreign investors turned cautious on Indian equities amid elevated valuations, global uncertainty and geopolitical tensions, according to a Morningstar report. The category saw net outflows of nearly $5 billion during the quarter ended March 2026, sharply higher than the $1.8 billion outflow recorded in the previous quarter. India-focused offshore mutual funds alone recorded net outflows of $3.46 billion during the quarter — the highest quarterly outflow since March 2020, when such funds had seen withdrawals of $3.58 billion. India-focused offshore ETFs also saw net outflows of $1.5 billion during the period after witnessing inflows in the preceding quarter.
The sustained selling and sharp correction in Indian equities led to a steep decline in offshore fund assets, with assets under management falling nearly 20% quarter-on-quarter to $77 billion at the end of March 2026 from about $96 billion in the December 2025 quarter. Foreign institutional investors (FIIs) remained net sellers in Indian equities during the quarter, with cumulative net outflows of nearly $14.2 billion. Indian equity markets witnessed a broad-based correction during the quarter, with the BSE Sensex declining 15.5% while the BSE Smallcap index fell 16.1%, making it the worst-hit segment.
The Morningstar report attributed the outflows to a mix of global and domestic factors, including geopolitical tensions in the West Asia, elevated US bond yields, a stronger dollar, rising crude oil prices and concerns over expensive valuations in Indian equities. Morningstar said valuations, particularly in the mid- and small-cap segments, had become disconnected from near-term earnings visibility, prompting profit booking after the strong rally seen in recent years. Among offshore investment vehicles, the iShares MSCI India ETF remained the largest India-focused offshore fund with assets of $6.7 billion, though it also witnessed one of the sharpest declines in assets during the quarter.
The Indian rupee continues to face significant pressure due to multiple headwinds, with sharp rise in crude oil prices, elevated US Treasury yields, and continued foreign portfolio outflows contributing to the currency's weakness. According to Kunal Sodhani, Head of Treasury & Global Trading Centre (FX & Rates Treasury) at Shinhan Bank, the rupee remains under sustained pressure from these factors. Market experts believe that aggressive RBI intervention is unlikely at this stage, with the central bank expected to opt for calibrated measures instead to manage the currency volatility.
