In an unprecedented move, foreign portfolio investors (FPIs) withdrew a staggering ₹1.6 lakh crore (USD 18 billion) from Indian equity markets in 2025, marking the worst year for foreign equity flows on record. This massive exodus surpassed the previous high outflow of ₹1.21 lakh crore witnessed in 2022, according to data from depositories. The sell-off was driven by a confluence of global headwinds and domestic factors, though analysts anticipate a sustainable return of flows in 2026.
The Perfect Storm: Global and Domestic Pressures
A cocktail of adverse global conditions triggered the risk-off sentiment among foreign investors. Persistently high US interest rates and elevated bond yields made developed markets more attractive, prompting a global capital rotation away from emerging economies like India. A strengthening US dollar further tightened financial conditions.
"Persistently high US interest rates and elevated bond yields improved risk-free returns in developed markets, prompting capital rotation and strengthening the dollar," explained Himanshu Srivastava of Morningstar Investment Research India. He added that geopolitical uncertainty and trade tensions, especially potential US tariffs, periodically dampened sentiment.
On the domestic front, stretched valuations in certain market segments led to tactical profit-booking. "These were short-term adjustments rather than a reassessment of India’s long-term growth story," noted Sorbh Gupta of Bajaj Finserv Asset Management. Phases of rupee depreciation also eroded dollar-denominated returns for FPIs, reducing India's risk-adjusted appeal.
A Silver Lining: Strong Debt Inflows and Domestic Support
While equities faced a brutal sell-off, the Indian debt market told a different story. FPIs invested a net over ₹59,000 crore in Indian debt in 2025 (till December 26). This shift was fueled by India's inclusion in global bond indices like the JP Morgan Global Emerging Markets Index, attractive yield differentials, and portfolio rebalancing during equity volatility.
"FPIs probably booked gains in the equity markets and rotated some of it into the debt FAR to lock-in the relatively higher interest rates," said Vikas Gupta of OmniScience Capital, highlighting the strategic move to secure returns ahead of an expected rate-cutting cycle.
The equity market found a crucial buffer in strong buying from domestic institutional investors (DIIs), supported by relentless inflows from retail investors through Systematic Investment Plans (SIPs). This domestic liquidity helped cushion the impact of the foreign withdrawal.
Sectoral Trends and the Path to Recovery in 2026
The outflow was not uniform across sectors. Financial services and IT bore the brunt of the selling, reflecting concerns over US growth prospects and pressure on net interest margins. In contrast, sectors like healthcare, utilities, and manufacturing attracted inflows, backed by long-term themes such as infrastructure development and the Production-Linked Incentive (PLI) scheme push.
Despite the bleak 2025, market participants are optimistic about a reversal in 2026. "We expect FPIs to return sustainably in India as nominal growth and earnings pick up in CY26," said Garima Kapoor, economist at Elara Securities. She pointed to potential triggers like the closure of a trade deal with the US, which could narrow tariff differentials, and anticipated Federal Reserve rate cuts that would soften the dollar, favouring emerging-market assets.
Domestic factors are also expected to aid the revival. "Indian earnings growth relative to peers, policy continuity and reforms, particularly around the Union Budget, could act as key triggers," added Vikas Gupta. However, the trajectory will remain sensitive to global macro developments, including the timing of rate cuts and trade policy moves.
The monthly flow pattern in 2025 highlighted the extreme volatility, with FPIs being net sellers in eight out of twelve months. The year began with a massive withdrawal of over ₹78,000 crore in January alone, setting a negative tone that largely continued through December, barring brief respites in April-June and October.
