The Indian equity landscape in 2025 was defined by a dramatic and historic divergence between two major investor classes. While domestic institutional investors (DIIs) poured unprecedented amounts of capital into the market, foreign institutional investors (FIIs) executed their largest-ever retreat, creating a fascinating tug-of-war that shaped the year's financial narrative.
The Great Divide: Record Inflows Meet Record Outflows
Data from brokerage firm Motilal Oswal Financial Services reveals the stark contrast in investor behavior. DII equity inflows soared to an all-time high of $90.1 billion in the calendar year 2025 (CY25), a massive jump from the $62.9 billion invested in CY24. This consistent domestic support highlights a decade-long trend, with DIIs cumulatively investing $255.8 billion over the last ten years (CY16-CY25), witnessing outflows in just one year since 2015.
On the opposite side of the spectrum, FIIs recorded their highest-ever equity outflows, withdrawing $18.8 billion in CY25. This marks a sharp escalation from the modest outflows of $0.8 billion seen in CY24. Over the same ten-year period, foreign investors have put a net total of $32.3 billion into Indian equities, with four years characterized by selling pressure.
Why Did Foreign Investors Exit Indian Stocks?
The FII sell-off gained momentum in the second half of 2025. In the cash segment alone, foreign investors have been net sellers since July 2025, offloading Indian stocks worth nearly ₹1.85 lakh crore in the six months from July to December. Analysts point to a confluence of four primary factors driving this capital flight:
- Slowing Corporate Earnings: The earnings growth of Indian companies began decelerating in mid-2024, a trend that continued through much of 2025. However, stability in September quarter results has sparked optimism for a healthy recovery starting from the third quarter of the fiscal year 2026 (Q3FY26).
- Premium Valuations: Despite some easing, Indian market valuations remain elevated compared to long-term averages. Motilal Oswal notes the Nifty trades at a 12-month forward P/E of 21.2 times, a 2% premium to its long-period average (LPA). The market capitalisation-to-GDP ratio stands at 133% of FY26 estimated GDP, far above the long-term average of 87%.
- India-US Trade Deal Uncertainty: The lack of a final trade agreement between India and the United States, despite multiple rounds of talks, has kept foreign investors cautious about the market's prospects.
- Rupee Depreciation: The Indian rupee's sharp decline against the US dollar significantly eroded returns for foreign investors. In 2025, the rupee fell by 4.72% against the dollar, its worst annual performance since 2022.
Will the Dichotomy Continue in 2026?
Market experts believe the opposing trends between DIIs and FIIs may persist in the early part of 2026, but a shift could be on the horizon. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, stated that while DII inflows will certainly continue, FIIs may keep selling initially due to rich valuations. However, FIIs are likely to turn buyers later in the year on signs of a sustained earnings recovery. A potential strengthening of the rupee in the first half of 2026 could also trigger foreign buying.
Shrikant Chouhan, Head of Equity Research at Kotak Securities, emphasized the critical role of the Indian rupee's trajectory. He noted that the currency's performance could swing between 87 and 92 against the dollar, with appreciation likely to attract FIIs back. Furthermore, a correction in the highly valued US markets could redirect global flows, including those from emerging markets, toward India.
In conclusion, the stage is set for a potential recalibration in 2026. Hopes are pinned on improving corporate earnings, a stabilizing rupee, and progress on the trade deal front to lure foreign investors back. If these factors align, the combined force of sustained domestic investment and returning foreign capital could propel the Indian market to deliver healthy double-digit returns in the coming year.
