Foreign Portfolio Investment Sees $3.9 Billion Net Outflow in FY26 Amid Global Volatility
The Economic Survey 2025–26, released on Thursday, has revealed that foreign portfolio investment (FPI) flows remained highly volatile throughout the fiscal year, culminating in a net outflow of $3.9 billion as of December 2025. This significant capital flight has been attributed to heightened global uncertainty and a strategic redirection of international funds towards AI-centric markets such as the United States, Taiwan, and South Korea.
Sustained Selling Pressure in Equities Contrasts with Debt Purchases
According to the survey, FPIs were net sellers of Indian securities between April and December 2025. While purchases were somewhat concentrated in the debt market, equities faced sustained selling pressure. This equity sell-off was driven by multiple factors:
- The relative underperformance of Indian equities compared to other major global markets.
- Prevailing trade and policy uncertainties within the domestic landscape.
- The depreciation of the Indian rupee against major currencies.
- A broad-based global risk-off sentiment, exacerbated by elevated US bond yields.
These elements collectively weighed heavily on investor sentiment, leading to cautious and often negative positioning by foreign institutional investors.
Export-Oriented Sectors Bear the Brunt of Equity Outflows
The survey highlighted that export-oriented sectors, particularly Information Technology (IT) and Healthcare, were especially impacted by the shifting investment patterns. This sectoral vulnerability contributed to continued FPI equity outflows during the first three quarters of FY26 (April–December). The report described FPI flows this year as "tepid", primarily due to the elevated global uncertainty and the increased allure of AI-related financial investments in technologically advanced economies.
Balance of Payments Deficit and Reserve Drawdown
The volatility in foreign capital movements had a direct impact on India's external account. It contributed to a balance of payments deficit of $6.4 billion in the first half (H1) of FY26. This marks a stark reversal from the surplus of $23.8 billion recorded in H1 of the previous fiscal year (FY25). To finance this deficit, the country relied on a drawdown in foreign exchange reserves.
A More Favorable Outlook for Debt Inflows
Looking ahead, the Economic Survey projects a more favourable outlook for FPI inflows, particularly into the Indian debt market. This optimism is supported by two key developments:
- The Securities and Exchange Board of India's (Sebi) relaxation of investment norms for foreign investors.
- Ongoing trade discussions between India and the United States, which could improve market access and sentiment.
Rising Asset Base Amid Declining Equity Ownership
Despite the outflows, the total asset base under the custody of FPIs stood at Rs 81.4 lakh crore as of December 2025. This represents a 10.4% increase from the level on March 31, 2025. The rise is largely attributed to valuation gains in the equity portfolio and steady accumulation in debt holdings.
However, a deeper look reveals a shift in ownership patterns. Within NSE-listed equities, FPI ownership declined to 16.9% in the second quarter (Q2) of FY26. This decline reflects the broader global risk aversion and strategic sectoral reallocations by foreign funds.
Domestic Institutions Step In to Stabilize Markets
In a contrasting trend, domestic institutional investors (DIIs) played a crucial stabilizing role amid the foreign outflows. DII ownership in NSE-listed equities rose to 18.7% as of September 2025, effectively helping to cushion the market against the volatility induced by FPI selling pressure.
