After a year of historic withdrawals, foreign portfolio investors (FPIs) are poised to make a significant return to the Indian stock markets in 2026, according to a new analysis. However, the nation's relatively low exposure to the booming artificial intelligence (AI) sector could pose a persistent risk to capital inflows.
Record Outflows in 2025 Set Stage for Reversal
In a bruising period for overseas capital, FPIs pulled out a staggering USD 17.5 billion from Indian equities in the calendar year 2025. This marked the highest annual outflow ever recorded in absolute terms, as highlighted in the "India Equity Strategy 2026" report by Antique Stock Broking Limited. The massive selling was driven by a combination of weak corporate earnings momentum, a global shift towards risk aversion, and more attractive opportunities in other markets, particularly those with heavy AI investments.
Market strategists now believe the conditions that triggered this exodus are beginning to ease. Several factors are turning supportive for a foreign investor comeback:
- Earnings Re-acceleration: Corporate profits are projected to grow sharply. Nifty earnings are forecast to expand at a compound annual growth rate (CAGR) of approximately 16% over FY26 to FY28, a significant jump from the roughly 7% growth seen in the prior two years.
- Stable Macroeconomic Backdrop: India's economy is expected to maintain a robust real GDP growth of around 7.5%, with inflation staying benign and the current account deficit projected to remain below 1% of GDP. A stable currency outlook and easing global monetary conditions further reduce macro risks.
- Reasonable Valuations and Low Ownership: Indian equity valuations appear reasonable compared to other emerging and developed markets. Furthermore, FPI ownership in India remains low despite the strong growth and macro outlook, suggesting room for increased allocation.
The Artificial Intelligence Conundrum: A Key Risk for India
Despite the positive indicators, a major headwind identified in the report is India's positioning in the global AI landscape. Global investors are increasingly directing capital towards markets and companies with direct AI exposure, such as those in semiconductors, advanced hardware, cloud infrastructure, and AI-native platforms.
The United States, Taiwan, and parts of East Asia currently dominate these critical value chains. In contrast, India, despite its formidable domestic growth story, is largely perceived as an AI user rather than a large-scale AI producer. This creates a fundamental mismatch between where global capital seeks exposure and where India's current strengths lie.
This "AI exposure gap" means a preference for AI-heavy emerging markets over India could sustain through 2026, even as other factors improve. The risk does not impact all sectors uniformly. While capital-intensive domestic-cycle sectors like banking, infrastructure, and consumption may continue to perform well based on local demand, sectors like technology services, traditional exporters, and other index-heavy segments could face relative neglect if they lack compelling AI monetisation narratives.
Domestic Flows to Provide a Counterbalance
The report also notes that domestic institutional investors are likely to continue providing steady support to the markets. Mutual fund inflows are expected to sustain, powered by systematic investment plan (SIP) flows, investments from the Employees' Provident Fund Organisation (EPFO) and the National Pension System (NPS), low domestic equity ownership levels, and the superior return profile of equities compared to other asset classes.
In summary, the stage appears set for foreign investors to stage a comeback in Indian equities in 2026 after a record exit last year. The revival hinges on improving earnings, macroeconomic stability, and attractive valuations. However, India's challenge will be to bridge the perception gap in artificial intelligence to fully capture the shifting tides of global capital and avoid sectoral divergence within its own markets.
