For overseas buyers, Indian risk assets in FY26 appeared to have been caught in the perfect storm due to the Iran conflict, a lingering uncertainty on tariffs, relatively expensive valuations, an AI-led decline in the business prospects of a $280-billion technology industry, and about 10% rupee slide against the dollar.
FY26 marks the second consecutive financial year of FII outflows and fourth in the previous five years, data from ETIG showed. Last year, FIIs withdrew ₹1.24 lakh crore from stocks and were on track to pull out a similar amount this fiscal year too. But their pace of exit accelerated in March after the start of the Iran war, with the rupee losing 4% in as many weeks. “Since March, the West Asia war raised risk-off sentiment that amplified the sell-off substantially,” said Rupen Rajguru, head, equity investment and strategy, Julius Baer India.
Domestic Appetite
“The weak currency is a big factor that eats into the returns of foreign investors and keeps foreign capital at bay this year,” said Rajguru.
Flows from domestic institutions – led by mutual funds, pension funds and insurers – into the stock market have been on an uptrend in the past five years. Their FY26 investments of ₹8.49 lakh crore exceeded total flows into equities in the previous two financial years, underscoring the domestic appetite for stocks despite the market sell-off.
Nifty and Sensex fell 5.1% and 7.1%, respectively, in the fiscal year. Both indices would have ended marginally higher or with modest losses but for the near 9.5% retreat in March – the worst monthly fall since 2020, the onset of the pandemic.
“Typically, one year of losses triggers domestic outflows, but this time, SIP (systematic investment plan) flows have remained largely steady despite 18 months of losses,” said Rajguru.
Retail investors have pumped ₹29,000 crore every month on average into domestic equity schemes in the past financial year. The return of foreign portfolio flows into India in the new financial year would depend on stability in the rupee, peace in West Asia and a decline in crude prices though a rush of overseas investments seem unlikely.
“Given the uncertainties arising out of the war on energy disruption and global reversal of interest rate cycle, the FPI flows are not expected to be positive immediately in the near future,” said Rajesh Iyer, managing director, global investment solutions and asset management, at LGT Wealth India.
Foreign institutional ownership of Indian companies is at a decadal low, and valuations are around 17 times the estimated price-to-earnings (PE) ratio, below the ten-year average, said Rajguru of Julius Baer India. “A lot of the damage is already done,” he said.
