Foreign Investors Retreat from Indian Markets in Historic Shift
Foreign institutional and portfolio investors have dramatically scaled back their exposure to Indian equities, with holdings in NSE-listed stocks plunging to a 15-year low following a substantial sell-off amounting to nearly Rs 2 lakh crore in 2025. This significant withdrawal marks one of the most substantial foreign capital outflows in recent Indian market history, according to latest data from the National Stock Exchange.
Steady Decline in FPI Ownership Across Market Segments
The September quarter witnessed a pronounced decline in foreign portfolio investor ownership across major indices. FPI ownership in Nifty 50 companies dropped by 43 basis points, while Nifty 500 companies saw a 46 basis point reduction, both settling at 13-year lows of 24.1% and 18% respectively. This indicates widespread selling activity across all market segments without discrimination.
This trend represents a continuation of the steady decline observed since March 2023, highlighting the unstable nature of foreign capital flows into Indian markets. The first half of fiscal year 2026 saw FPI share in NSE-listed companies fall by 63 basis points to 16.9%, establishing the lowest ownership level in over 15 years.
The reduction directly resulted from net FPI outflows totaling $8.7 billion during the quarter. Consequently, the total value of FPI holdings in NSE-listed companies decreased by 5.1% quarter-on-quarter to Rs 75.2 lakh crore as of September 30, 2025. Despite this recent downturn, FPIs have maintained an impressive 17% annualized growth over the past two decades, according to the NSE data analysis cited by Economic Times.
Sectoral Preferences and Domestic Institutions Fill the Void
Foreign investors demonstrated clear sectoral preferences during this period. They maintained heavy investments in financials while increasing their exposure to communication services. However, they displayed considerable caution toward consumption and commodity-related sectors, maintaining reduced positions in consumer staples, energy, and materials. Their stance remained negative on industrials, with a slightly pessimistic outlook on information technology sectors. They maintained neutral positions on consumer discretionary—showing slight optimism following recent GST changes—along with healthcare, utilities, and real estate.
While foreign investors retreated, domestic mutual funds achieved remarkable milestones, setting new ownership records across all market segments in September. This marked their ninth consecutive quarter of peak ownership, supported by steady equity inflows. Domestic mutual funds invested Rs 1.64 lakh crore in the second quarter of FY26, representing their 18th consecutive quarter of positive flows.
This sustained domestic investment increased their ownership to 13.5% in Nifty 50, 11.4% in Nifty 500, and 10.9% in all NSE-listed companies. The collective strength of domestic institutional investors enabled them to achieve 18.7% ownership in NSE-listed firms, exceeding FPI ownership for the fourth consecutive quarter.
Retail Investors Show Resilience in Challenging Market
Individual investors demonstrated remarkable stability during this period of foreign exit. Their ownership in NSE-listed companies remained consistently between 9.5% and 9.8% over nine consecutive quarters, eventually settling at 9.6% in September 2025. This stability was bolstered by renewed retail investor inflows amounting to Rs 20,469 crore.
A particularly noteworthy trend emerged when excluding the top 10% companies by market capitalization. Individual investor ownership increased by 48 basis points to reach a 19-year high of 16.7%, indicating growing retail interest in mid and small-cap stocks despite the broader market challenges.
The contrasting behavior between foreign and domestic investors highlights a significant shift in Indian market dynamics, with local institutions and retail investors increasingly driving market momentum while foreign participants reassess their positions amid global uncertainties and valuation concerns.
