Foreign investors are set to close a second consecutive financial year as net sellers of Indian equities, as a mix of global and domestic headwinds weighed on market sentiment.
Analysts believe FII selling may continue in the first half of the new financial year 2026-27 (H1FY27), with a clearer trend emerging only in the second half (H2FY27).
Why are FIIs selling in Indian markets?
Prabhakar Kudva, director and principal officer – Portfolio Management Service, Samvitti Capital, said three reasons explain FIIs’ exit from Indian markets.
“First, India’s earnings growth decelerated meaningfully. Second, the long-term capital gains (LTCG) tax hike made India less attractive on a post-tax return basis. Third, other Asian markets like Korea and Taiwan offered better near-term returns due to AI-related tailwinds,” he said.
“FIIs currently hold $700-750 billion in Indian equities but may reallocate to other markets if the rupee weakens further. FII flows would improve when the rupee stabilises and earnings growth picks up,” Vinay Jaising, chief investment officer and head of equity advisory at ASK Private Wealth said.
FIIs flows outlook in FY27
FII inflows, Ankit Soni, vice president for fundamental research at Mirae Asset ShareKhan, said would be majorly skewed towards H2FY27 because H1FY27 earnings will be impacted by the war scenario.
The Street is currently factoring in Nifty50 earnings growth of around 12-14 per cent in FY27. However, if crude oil prices remain elevated in the $85-$90 range over the next few months, earnings growth expectations may be revised lower to around 10 per cent, analysts said.
Sandeep Nayak, managing director and chief executive officer of Centrum Finverse, added that the US Federal Reserve will have room to maintain a downward rate trajectory if geopolitical tensions ease and oil prices soften in FY27, aiding capital flows into emerging markets like India in H2FY27.
“Also, a successful conclusion of the US-India trade agreement could inspire FIIs to reallocate capital to India,” he said.
Can DII flows continue to absorb FII exodus?
Domestic institutional investors (DIIs), meanwhile, are expected to remain a steady pillar of support for Indian equities in FY27.
Beyond mutual funds, analysts said flows from insurance companies and EPFO allocations are also expected to remain strong in FY27. With EPFO equity exposure at around 10 per cent and room to increase further, incremental flows could add meaningful liquidity to the market, they said.
“Mutual funds currently hold around 5.9 per cent cash, implying deployable liquidity of roughly $6 billion. Given the steady inflows from SIPs, insurance, and pension funds, DII inflows could exceed $100 billion in FY27,” Vinay Jaising said.
That said, while retail participation has shown resilience even during volatile periods, analysts said its sustainability will depend on market returns.
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