Foreign Portfolio Investors (FPIs) have withdrawn ₹3.7 lakh crore from Indian equities in 2026 so far, according to latest data, bringing total outflows this year to ₹2.45 lakh crore - surpassing the entire ₹1.66 lakh crore outflow recorded in 2025. The latest selling follows FPIs investing ₹20,200 crore in July and ₹29,630 crore in August, with FPIs selling $1.7 billion of Indian equities in September alone, as reported by CNBC TV18. The heavy foreign selling has added pressure to the Indian rupee, which hit a record low of 96.96 per US dollar in May 2026, prompting the Reserve Bank of India to intervene in the foreign-exchange market. According to Bernstein analysts led by Venugopal Garre, the view is based primarily on the easing of recent headwinds rather than any meaningful improvement in structural factors that drive long-term foreign capital allocation.
According to Geosphere Capital Management's Arvind Sanger, the most pressing reason for FPI outflows is oil because of India's reliance on imported crude. As reported by ET Now, India imports 85% of its oil, so the FIIs anticipated currency weakening and pulled out the money, fearing that India was going to be in a fiscally tough situation with inflation going out of control. Sanger noted that India is one of the harder-hit countries from both higher prices and lack of availability of oil, fertilizer, LNG and LPG from the Middle East. The oil crisis has created a perfect storm for foreign investors, with global investments driven by AI, rupee depreciation and geopolitical concerns contributing to the negative perception about the country while its valuations remain high. Sense and Simplicity's Sunil Subramaniam emphasized that the sheer volume of the sales has continued to put pressure on Indian markets despite the fact that domestic players are still providing a cushion.
Foreign investors are not exiting India but becoming more selective, with selling in the secondary market reflecting a broader global risk-off environment even as interest in IPOs and other primary-market opportunities remains relatively strong, according to Choice Wealth's Dheeraj Gaur. As reported by NDTV Profit, elevated US yields, crude prices, a weaker rupee and the rotation towards the AI trade in Taiwan and Korea are driving the current shift. Gaur describes the current foreign-investor positioning as "reallocate, not abandon", noting that India's fundamentals remain among the strongest globally with GDP growing 7.8% in Q1 FY27 and Q1 earnings remaining strong. The India's weight in the MSCI Emerging Markets index has roughly halved from about 20% in mid-2024 to around 11% by May 2026, which is broadly in line with its long-term average and foreign ownership is at a 17-year low. Gaur believes that once the global macro backdrop stabilises, foreign investors could return to the Indian secondary market.
Peaking of artificial intelligence (AI) trade across global markets offers little hope of flows returning to Indian markets, according to Bernstein. The brokerage emphasized that global capital was never designed to chase annuity-like returns while accepting the valuation, liquidity, and execution risks that increasingly characterize parts of the Indian market. With no local champions in artificial intelligence and the IT services industry facing the brunt of AI advancements, India is widely seen as an anti-AI trade. Jefferies' Christopher Wood told ET Now that the fastest way for foreign money to return to India will be an aggressive collapse in AI capex, explaining that AI capex trade continues to attract foreign flows. Bernstein pointed out that even if the global AI trade weakens, India is unlikely to see any major reversal of foreign capital flows, stating it would be a folly to think that it's just a matter of time, and once the AI trade settles and the Middle East crisis resolve, foreign money is just waiting to be parked into India. A structural revival in foreign inflows will depend on India's ability to build globally competitive industries in emerging areas: advanced semiconductor manufacturing rather than just assembly, deep capabilities in batteries and energy storage, greater energy self-sufficiency, and business models that can win meaningful market share globally.
According to Marcellus Investment Managers' Saurabh Mukherjea, the removal of the long-term capital gains tax from FII and a positive Q2 may help attract foreign investors back to Indian markets. As reported by ET Now, India is the only large economy which imposes long-term capital gains tax on foreign investors, and I think that's proven to be a real challenge. Pacific Paradigm Advisors' Punita Kumar-Sinha noted that reducing taxes may help bring FIIs back, but it may not keep them. Geosphere Capital Management's Arvind Sanger added that India needs to be more competitive from a tax policy standpoint, and if government relaxes taxes, that would be helpful, but it also may not be sufficient. The tax cut might remove one of the obstacles, but the re-entry of foreign investments will probably be possible only with the improvement of several other factors like a stronger economy, positive earnings growth and lower inflation. For now, the main issue isn't the ability of foreigners to invest in India again, but the conditions India needs to provide for the same to happen.
