Foreign investors fled Indian equities in 2025 at a scale never seen before, pulling out a record Rs 1.6 lakh crore ($18 billion) as volatile currency movements, global trade tensions, especially potential US tariffs, and stretched valuations eroded risk appetite, though flows are expected to turn sustainably positive in 2026.
Illustration: Dominic Xavier/Rediff
Also, rising US bond yields, a stronger dollar and concerns over geopolitical uncertainties tilted global capital towards developed markets, away from emerging markets such as India.
Despite the weak showing this year, market participants expect the trend to reverse in 2026.
“We expect FPIs to return sustainably in India as nominal growth and earnings pick up in CY26.
“Closure of the trade deal with the US should narrow tariff differentials, while Fed rate cuts will keep the dollar soft, favouring emerging-market assets,” said Garima Kapoor, deputy head of research and economist at Elara Securities India.
Apart from global tailwinds, domestic factors are also expected to play a role in reviving flows. Indian earnings growth relative to peers, policy continuity and reforms, particularly around the Union Budget, could act as key triggers, said Vikas Gupta, CEO and chief investment strategist at OmniScience Capital.
At the same time, uncertainty on the global macro front will continue to shape FPI behaviour.
“The trajectory of global interest rates, especially the timing and pace of rate cuts, along with developments on tariffs, will be key drivers,” said Himanshu Srivastava, principal manager-research at Morningstar Investment Research India, adding that a moderation in US bond yields and a softer dollar could further support a revival in equity inflows.
As of now, foreign portfolio investors (FPIs) have taken out Rs 1.58 lakh crore from the Indian equity markets, while invested over Rs 59,000 crore in the debt market (till December 26) as per data available with the depositories.
This makes 2025 the worst year for equity flows, surpassing the previous record outflow of Rs 1.21 lakh crore in 2022 and coming after a marginal net inflow of just Rs 427 crore in 2024.
In contrast, 2023 had seen a robust Rs 1.71 lakh crore equity investment.
Explaining the drivers, analysts point to a mix of global and local pressures.
“Persistently high US interest rates and elevated bond yields improved risk-free returns in developed markets, prompting capital rotation and strengthening the dollar, tightening financial conditions for emerging markets,” Srivastava said.
Phases of rupee depreciation further eroded dollar-based returns and raised hedging costs, dampening India’s risk-adjusted appeal.
These pressures were compounded by geopolitical uncertainty as concerns over energy prices, supply-chain disruptions and trade-related tensions periodically weighed on sentiment, he added.
On the domestic front, elevated valuations in certain segments prompted tactical profit-taking, said Sorbh Gupta, head-equity at Bajaj Finserv Asset Management adding that these were short-term adjustments rather than a reassessment of India’s long-term growth story.
The monthly flow pattern reflects this volatility.
FPIs sold equities in eight of the 12 months in 2025, with buying limited to April, May, June and October.
The equity sell-off by FPIs was cushioned by strong buying from domestic institutional investors, supported by rising SIP (Systematic Investment Plan) inflows from retail investors.
In contrast to equities, FPIs showed a clear preference for debt, investing a net Rs 59,000 crore in Indian debt in 2025, driven by India’s inclusion in global bond indices, attractive yield differentials and portfolio rebalancing amid volatile equity markets.
The phased inclusion of Indian government bonds under the Fully Accessible Route (FAR) in indices such as the JP Morgan Global Emerging Markets Index created steady demand from passive funds, Morningstar’s Srivastava said.
According to OmniScience Capital’s Gupta, 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 in the Indian debt.
“It is clear that we are in for a rate cutting cycle and Debt FAR offers locking-in higher interest rates with an upside from capital gains when the cuts happen,” he added.
Sectoral trends mirrored these shifts, with financial services and IT seeing the heaviest outflows amid concerns over US growth, a weak capex cycle and pressure on net interest margins, while healthcare, utilities and manufacturing attracted inflows on the back of long-term themes such as infrastructure build-out and the PLI-led manufacturing push.
Overall, FPIs began 2025 on a weak footing, withdrawing over Rs 78,000 crore in January on depreciation of the rupee, rise in the US bond yields, and expectation of a tepid earning season.
This sell-off continued till March taking out Rs 1.16 lakh crore in the first three months of the year amid escalation in global trade tensions.
Although they returned with net investments of Rs 38,600 crore between April and June, the recovery was short-lived, with sales resuming from July through September.
After a brief return in October with a net investment of Rs 14,610 crore, FPIs again turned net sellers in November and December amid weak global cues.
