Foreign institutional investors (FIIs) have been net sellers of Indian equities for five out of the nine months of 2026. FIIs have sold Indian securities worth Rs 2,15,300.55 crore according to data from the NSDL and CDSL websites.
In the last two years, FIIs have pulled out nearly $40 billion over the past two years since September 2024. According to a research note by Bernstein, the month of September 2024 marked the final period where monthly foreign inflows exceeded $5 billion.
After September 2024, there has been an unending selling spree in the market, with only brief respite seen for a few months. On the other hand, over an entire decade, foreign funds have accumulated only $4 billion in net Indian equity purchases, which is in stark contrast to domestic institutional investors (DIIs), who have net purchased over $300 billion in the same timeframe.
While foreign investors followed well-defined cycles in the last decade, the pattern seems to have changed, according to Bernstein, as DIIs have increasingly stepped in to buy domestic securities. Bernstein said this is likely due to the fact that the fundamental premise of treating India as an automatic portfolio destination has fractured.
Why The ‘Bright Spot’ Narrative Fell Apart
Bernstein mentioned in the note that the underlying thesis that India represents an unassailable economic ‘bright spot’ has been facing resistance. Over the past decade, the benchmark Nifty delivered an annualised return of negative 6 per cent in dollar terms, with dollar-denominated losses widening to around 11 per cent annualised over the last two years. Amid a weakening rupee, currency depreciation has eroded the performance of benchmark indices, making foreign investors look beyond India.
Bernstein added that another reason for the exodus of foreign capital is that the traditional macroeconomic drivers no longer explain capital movements. While foreign capital tracked real gross domestic product (GDP) expansion historically, the correlation has now weakened and turned negative in recent cycles. Additionally, the interest rate differential between the Federal Reserve and the Reserve Bank of India (RBI) which guided allocations between 2012 and 2018 has also ceased to function as a catalyst for driving FIIs to invest in the Indian market. Instead, foreign flows have grown sensitive to exchange rate swings and India’s elevated price-to-earnings (P/E) premium relative to other emerging market peers according to Bernstein.
The composition of India’s corporate universe, especially in terms of large-caps, also follows business models which are not future friendly, and rely on policy-level protection, which in turn has made FIIs to seek investments in other markets which offer plays like electric vehicles, artificial energy and semiconductors.
Bernstein said: “Many of India’s large caps represent a bygone economic era. Most are not investing in the future, but consolidating their past, often expecting policy to continue shielding them from global competition.”
On the other hand, Bernstein mentioned that despite this, the small-and-mid-cap spaces harbour growth potential. However, the small-and-mid-cap category continues to face thin free floats, limited liquidity, and high volatility, making them tough for FIIs to identify and invest in.
What Bernstein Projects For FII Flows
Looking ahead over the coming year, Bernstein projects foreign portfolio flows to remain muted rather than staging an aggressive turnaround.
“Our view that FII flows are likely to be flat to modestly positive over the next 12 months remains unchanged after two years of significant outflows,” Bernstein said.
The brokerage highlighted that any uptick in FII flows is expected to come from an easing of immediate external headwinds rather than a sudden resolution of long-term structural handicaps.
The brokerage firm cautioned investors against believing that foreign capital is merely waiting on the sidelines for the global turbulence to abate.
“It would be folly to think that it’s just a matter of time, and once the AI trade settles and the Middle East crisis resolves, foreign money is just waiting to be parked into India. It is not, and it’s time India realizes this,” Bernstein said.
In the near term, global institutions are far more inclined to trade tactical swings than commit durable, long-term capital like they did in the past. However, the brokerage also mentioned certain key catalysts which are expected to lead to FIIs returning to the domestic market:
Cyclical Relief and Energy Cost Easing
Short-term foreign inflows centre on cyclical macroeconomic relief. Lower global crude oil benchmarks can help in lowering India’s import bill and ease import-driven inflation and current account vulnerabilities. Bernstein mentioned that if energy costs fall and macroeconomic conditions ease, tactical liquidity can potentially return to the Indian market.
Rupee Stabilisation
Lower volatility and more predictability in the rupee-dollar exchange rate predictability is another prerequisite for halting foreign outflows. According to the brokerage there is a correlation exceeding 70 per cent between rupee fluctuations and foreign investment trajectory.
Thus, when the rupee depreciates steadily against the dollar, international investors suffer direct portfolio erosion in dollar terms regardless of local index gains. A sustained stabilisation in the rupee is likely to protect dollar-denominated returns and remove a primary deterrent for FIIs.
Valuation Realignment
India’s persistent valuation premium over emerging market equities has also acted as a severe barrier to entry. Bernstein mentioned that foreign money has dried up in periods where domestic equities traded at valuation premiums above the broader emerging market basket.
For FIIs to return even in a minor way, India either requires a valuation compression or an acceleration in prospective three-month consensus earnings revisions, according to Bernstein.
Upgrades in forward earnings expectations can also provide the fundamental justification needed for foreign investors to warrant deploying fresh capital.
Scale In Advanced Manufacturing
Beyond temporary cyclical rebounds, structural fund allocation demands that India build globally competitive industries. Bernstein emphasised that foreign allocators are not structured to accept high execution and valuation risks simply for annuity-like domestic returns.
Long-term institutional commitments require India to prove it can build advanced capabilities in critical sectors, such as semiconductor fabrication rather than simple assembly, large-scale battery manufacturing, grid storage, and proprietary deep technology
Domestic blue chips with the deepest balance sheets will also need to transition from defensive consolidation toward committing real risk capital into next-generation businesses.
As regulatory shields and domestic policy supports encounter fiscal boundaries, large-cap companies will need to demonstrate that they can innovate and gain market share on the global stage, it added.
