Foreign Investors Rewrite Indian Market Rules in 2025 with Massive Sector Rotation
Foreign portfolio investors executed a dramatic strategy shift in the Indian equity markets during 2025. While they withdrew a staggering ₹1.67 trillion from equities overall, this headline figure masks a deeper story of selective investment and sectoral realignment.
The Cyclical Sectors Emerge as Clear Winners
Telecommunications emerged as the undisputed champion for foreign money. For the third consecutive year, this sector attracted strong inflows despite broader market turbulence. Analysis of CMIE data reveals overseas investments in telecom surged from ₹5,529 crore in 2023 to ₹23,737 crore in 2024, before skyrocketing to ₹48,222 crore in 2025.
The oil and gas sector staged a remarkable comeback. After suffering sharp outflows of ₹22,813 crore in 2023 and ₹56,340 crore in 2024, it welcomed ₹8,431 crore in fresh foreign investment during 2025. Metals and chemicals, sectors heavily influenced by global demand cycles, also returned to positive territory. They attracted ₹4,661 crore and ₹6,017 crore respectively, marking their strongest foreign buying activity in three years.
"Foreign portfolio investors pivoted decisively toward cyclical sectors like telecom, oil & gas, chemicals, and metals in 2025," explained Akshat Garg, head of research and product at Choice Wealth. "They channeled billions into these areas, drawn by attractive valuations and robust earnings momentum."
Garg noted that telecom benefited from strong performers like Bharti Airtel and positive tailwinds from the 5G rollout. The oil sector gained from Reliance Industries' stellar refining margins and resilient global energy demand. Chemicals and metals appealed to investors due to domestic infrastructure capital expenditure, shifting supply chains, and hopes for a Chinese economic recovery.
Anil Rego, founder and fund manager at Right Horizons PMS, highlighted that cyclicals entered 2025 with a favorable risk-reward profile. Many sectors were emerging from multi-year downturns, supported by tariff repairs, lower capital expenditure intensity, and improved pricing power. Metals and chemicals gained from the bottoming out of global inventory cycles and easing supply-related pressures from China.
Rego added that global investors positioned themselves for a late-cycle recovery theme. This strategy built on hopes for a soft landing in the US economy, stable global growth, and eventual interest rate cuts. In such market phases, cyclicals typically outperform when earnings upgrades coincide with valuation adjustments.
Former Favorites Face Aggressive Selling Pressure
The information technology sector bore the brunt of the most aggressive foreign selling. After modest outflows in 2023 and a brief return of inflows in 2024, the trend reversed sharply in 2025. Foreign investors exited the IT sector to the tune of a steep ₹74,698 crore.
Consumer-facing businesses struggled immensely. Fast-moving consumer goods (FMCG) witnessed accelerating outflows for the third straight year. Outflows rose from ₹20,191 crore in 2024 to ₹36,786 crore in 2025. Consumer durables and services faced similar pressure, recording their highest outflows of ₹21,369 crore and ₹16,524 crore respectively during the year.
The reversal extended to previously strong sectors. Automobiles and components saw an exit of ₹11,898 crore in 2025. Capital goods recorded an outflow of ₹2,581 crore. Even financial services, long considered a core holding for foreign portfolio investors, turned negative with ₹14,903 crore in outflows. The power sector experienced intense selling pressure of ₹26,522 crore.
Analysts attribute these massive exits to stretched valuations and slowing earnings momentum. Rego pointed out that IT, FMCG, and parts of the banking, financial services and insurance (BFSI) sector traded at meaningful premiums early in 2025, even as business conditions weakened.
In IT, discretionary technology spending stalled. FMCG faced erratic volume growth. Within BFSI, investors grew cautious about credit cost normalization and stricter capital requirements. Garg added that global slowdown fears, rural demand weakness, and the lack of a broad-based consumer recovery further weighed on market sentiment toward these sectors.
What Lies Ahead for the Indian Market?
Looking forward, analysts expect the sharp sector rotation witnessed in 2025 to gradually cool rather than intensify. Garg believes this cyclical tilt will moderate over the next two to three quarters into mid-2026. Broader foreign portfolio investor re-entry could gather steam amid stabilizing macroeconomic conditions.
Earnings acceleration to a 16% compound annual growth rate, benign inflation, and 7.5% GDP growth could lure funds back to IT and financial sectors. Artificial intelligence tailwinds and bond index inclusions may provide additional support. Persistent rupee pressures and US policy risks remain, but easing global interest rates could prompt rotation rather than outright reversal.
This environment may favor balanced portfolios that blend cyclicals with quality defensive stocks. Domestic inflows from systematic investment plans will likely cushion any market volatility.
Rego expects foreign portfolio investors to continue favoring structurally strong cyclical companies. However, he believes the easy phase of re-rating is probably over. Future flows will likely be driven more by company-specific fundamentals like earnings visibility and free cash flow generation, rather than broad sector themes.
Selective re-entry into IT and consumer sectors remains possible if valuations become reasonable and earnings stabilize. For investors, the current environment favors a bottom-up, stock-picking approach over chasing broad sector narratives.
