In a dramatic shift of sentiment, foreign institutional investors (FIIs) have executed one of the most severe sell-offs in recent years, withdrawing close to a staggering Rs 2 lakh crore from Indian equities in 2025. This massive capital flight, concentrated in six key sectors, has sparked intense debate on whether the pressure will subside by year-end or extend into the next calendar year.
Scale and Sectoral Breakdown of the Exodus
Data from the National Securities Depository Ltd (NSDL) reveals that FIIs have pulled out a net Rs 1.6 lakh crore from Indian equities in 2025, marking a decisive change in risk appetite after a prolonged phase of steady inflows. The selling has been far from uniform, with specific sectors bearing the brunt of the exit.
The information technology sector was the hardest hit, witnessing outflows of Rs 79,155 crore. It was closely followed by the fast-moving consumer goods (FMCG) sector, which saw Rs 32,361 crore exit, and the power sector, with outflows of Rs 25,887 crore. The retreat was broad-based, with healthcare, consumer durables, and consumer services sectors also experiencing significant withdrawals of Rs 24,324 crore, Rs 21,567 crore, and Rs 19,914 crore respectively.
ICICI Securities noted, "Foreign institutional investors have been net sellers of Indian equities to the tune of US$17.8 billion in CY25, as this liquidity has flowed into other global equity markets such as China, Japan, Europe and the US." The brokerage highlighted that while Indian markets delivered muted returns, global peers posted gains between 12% and 61%.
Limited Bright Spots Amidst the Sell-Off
The selling pressure extended beyond the worst-hit segments. Realty, financial services, and automobile stocks also saw outflows ranging from Rs 9,242 crore to Rs 12,364 crore. In stark contrast, only a few sectors managed to attract foreign capital. The telecom sector led with inflows of Rs 47,109 crore, followed by oil and gas (Rs 9,076 crore) and services (Rs 8,112 crore).
Will 2026 Bring a Turnaround in Foreign Flows?
Despite the intensity of the exits, some market strategists believe the worst may be over. Amish Shah, head of India research at Bank of America, suggested a reversal in flows is possible. "We do think that the outflows will at least reverse. Whether that leads to inflows is the debate. But the probability of that $18 billion outflow moving towards zero is quite high," he told ET.
Shah pointed to three potential triggers for a recovery: expected Nifty returns of around 12%, anticipated US Federal Reserve rate cuts of 75 basis points, and a possible weakening of the US dollar, which historically benefits emerging markets.
An interesting dynamic noted by ICICI Securities is the surge in IPO investments. FIIs invested $7.1 billion in IPOs in 2025, which accounts for roughly 40% of the amount they sold in secondary markets. Meanwhile, domestic mutual funds provided a cushion with strong Systematic Investment Plan (SIP) inflows of Rs 3.2 lakh crore, though much of this was directed towards large-cap stocks and new listings.
Divergent Views from Global Brokerages
The outlook for 2026 remains a point of contention among leading brokerages:
- Morgan Stanley observed that FII positioning is near cyclical lows but cautioned that sustained buying requires a recovery in growth, cooler equity markets elsewhere, or increased corporate issuances.
- Nomura struck a guarded note, stating, "We do not anticipate a surge in FII flows, as market valuation at 20.7x one-year forward earnings is close to the recent peak, and earnings growth of 10–15% is not very compelling in our view."
- Axis Securities offered a more constructive view, expecting 2026 to transition Indian equities from a valuation-led consolidation to an earnings-led market, advocating a 'buy on dips' strategy.
ICICI Securities identified PSU banks as offering an attractive risk-reward proposition and suggested IT stocks merit a fresh look after recent corrections. Conversely, Jefferies maintained an overweight stance on sectors like financials, telecom, and autos, while remaining underweight on IT, consumer staples, and healthcare.
The massive FII exodus of 2025 has undeniably reshaped the landscape of Indian equities. As the market looks towards 2026, the interplay of domestic resilience, global monetary policy, and relative valuations will determine if foreign capital makes a decisive return to India's shores.
