Foreign Investors Retreat as Budget Approaches: Domestic Players Take Center Stage
For the fourth consecutive year, foreign portfolio investors (FPIs) are executing a strategic retreat ahead of the Union Budget, creating a familiar pattern on Dalal Street. Since 2023, these overseas investors have consistently used the pre-Budget period to reduce exposure, seeking safer havens elsewhere. This year follows the established trend, with FPIs maintaining a selling spree that began in November.
The Numbers Tell a Story
The data reveals a clear pattern of foreign capital movement. In 2026, FPIs have recorded sharp outflows exceeding ₹36,000 crore so far, compared to ₹78,027 crore during the same period last year. This represents a significant pivot from two months of sustained buying to consistent selling. The trend first emerged in 2023, repeated in 2024 with January selling despite previous inflows, and intensified in 2025 with three consecutive months of equity offloading between January and March.
In stark contrast, domestic institutional investors (DIIs) have undergone a remarkable transformation. Once considered secondary players, they have now become the primary engines driving India's capital markets. This shift has been propelled by a steady stream of retail systematic investment plans (SIPs), which continue to pour substantial liquidity into Indian equities.
Budget Relevance in Question?
This evolving dynamic raises important questions about the Union Budget's significance in today's market landscape. Ajit Mishra, Senior Vice President of Research at Religare Broking, provides crucial perspective: "The Union Budget remains one of the most critical domestic events, not just for equity markets but for the entire financial ecosystem. It sets the direction for long-term policy goals while outlining milestones for sustained economic growth."
Mishra further clarifies that FPI selling in recent years, including pre-Budget movements, has largely been driven by valuation arbitrage opportunities rather than any loss of confidence in the Budget's relevance. Domestic investors' resilience stands in sharp contrast to foreign investors' retreat, with the latter being influenced by multiple factors including heightened geopolitical tensions, global trade concerns, tepid third-quarter earnings, and elevated market valuations.
Fiscal Challenges and Market Expectations
As Budget 2026-27 approaches, the government faces significant fiscal constraints. With uneven global growth and moderating domestic consumption, a tighter fiscal strategy becomes essential, naturally lowering market expectations. The administration must navigate a strict fiscal glide path, leaving limited room for substantial expansion in capital expenditure.
An Axis Direct report highlights one of the key challenges: "balancing capex-led growth with consumption support." Mishra notes that with the government committed to maintaining the fiscal deficit around 4.3-4.4%, the scope for large populist measures remains limited without risking fiscal credibility. "After several years of strong growth, infrastructure spending is expected to moderate as execution capacity peaks," he adds.
The Fiscal Reality Check
The central government's fiscal situation remained stretched in FY26, primarily due to weak tax collections. According to a JM Financial report, tax collections remained muted during April-November 2025, constituting only 54.7% of FY26 budgeted estimates. This figure stands significantly lower than the average value of 59.5% recorded during the last four years.
Similarly, the fiscal deficit during the first eight months of FY26 reached 62.3% of budget estimates, representing a stretched position compared to historical averages. This fiscal reality creates a challenging backdrop for Budget formulation.
Market Priorities and Potential Catalysts
Rather than expecting headline-grabbing measures, experts believe the market is prioritizing a Budget rooted in fiscal prudence and tax certainty. Such an approach would serve as a crucial buffer against an increasingly uncertain global backdrop. Historical data supports investor hesitation, as Budget Day rallies have been rare, with performance remaining largely mixed and showing no consistent pattern of pre- or post-Budget gains.
Mishra outlines potential scenarios: "The Budget could spark a recovery if meaningful tax relief is extended to investors—such as on securities transaction tax or long-term capital gains. Alternatively, it could lead to consolidation if fiscal discipline remains the overriding priority."
Long-Term Perspective
Given that the Budget primarily aims to establish long-term growth policies, it is unlikely to significantly alter short-term market trajectories. In the near term, markets will continue to take cues from corporate earnings, trade developments, and the evolving geopolitical landscape. The transition from foreign to domestic dominance in market participation represents a structural shift that may redefine how Indian equities respond to both domestic and global events moving forward.
As India's capital markets mature, the increasing influence of domestic investors through systematic investment channels suggests a more stable foundation, potentially reducing volatility associated with foreign capital movements. This evolution could ultimately strengthen India's position in global financial markets while creating more predictable investment environments for all participants.
