Foreign Institutional Investors (FIIs) have not altered their cautious stance on Indian equities in the new year, continuing a sustained selling spree that began in mid-2025. This persistent outflow comes even as large-cap valuations hover near long-term averages and expectations for robust December quarter results remain elevated.
Six Months of Relentless Selling: The Numbers
In the cash segment, FIIs have offloaded Indian stocks worth over ₹8,400 crore so far in January 2026. This selling is part of a larger trend that started in July 2025. From July through December last year, these investors cumulatively sold Indian equities worth a staggering nearly ₹1.85 lakh crore.
According to estimates from Motilal Oswal Financial Services, the calendar year 2025 witnessed the highest-ever equity outflows from FIIs, amounting to $18.8 billion. The current market sentiment remains fragile, weighed down by renewed worries over potential US tariffs and a delayed India-US trade agreement, despite multiple rounds of negotiations.
Double Whammy: Trade Deal Delays and Tariff Threats
A significant overhang for the market is the looming threat of sharply higher US tariffs. Concerns have escalated following statements by Republican Senator Lindsey Graham on January 7. He claimed that US President Donald Trump backed the "Sanctioning of Russia Act of 2025," which could raise US tariffs to at least 500% on countries purchasing Russian oil.
This geopolitical development adds a critical layer of uncertainty. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, emphasized the economy's urgent need for a trade pact. "If the trade agreement doesn’t happen, that will impact India’s macroeconomic stability through a wider trade deficit, a weakening currency, and further capital outflows," he stated.
Can Q3 Earnings Be the Game Changer?
Market experts are now looking at the upcoming Q3 corporate earnings season as a potential catalyst to alter FII sentiment. The primary reasons for the prolonged selling have been premium valuations and a slowdown in corporate earnings growth that began in mid-2024 and persisted through 2025.
Shrikant Chouhan, Head of Equity Research at Kotak Securities, believes improved earnings could shift FIIs' stance. "If earnings improve, we can expect a more positive stance from FIIs. Strong and healthy earnings growth in India can also attract FII inflows, even in the presence of ongoing trade deal uncertainties," Chouhan noted.
Ajit Mishra, SVP of Research at Religare Broking, shares a similar optimism. He pointed out that India's valuation premium relative to other emerging markets is currently below its historical average. "Strong Q3 earnings, led by financials, industrials and consumption, could trigger earnings upgrades and a re-rating," Mishra said. He added that in a selective global capital environment, improving earnings visibility may outweigh near-term trade worries.
However, Vijayakumar cautioned that while Q3 earnings are expected to be good, they may not be enough to systematically bring FIIs back. He linked sustained economic growth and, by extension, strong corporate earnings in FY27, to the successful conclusion of a trade agreement.
For a sustained reversal, Chouhan highlighted another crucial factor: "For sustained and meaningful inflows, we would ideally need underperformance in US markets along with a decline in bond yields, as lower yields tend to redirect global capital towards emerging markets." Some analysts also speculate that FIIs might already be pricing in an eventual India-US trade deal, given India's strategic importance to the US, shifting their immediate focus squarely to earnings performance.
