For foreign buyers, Indian risk assets appeared to be caught in a perfect storm in FY26 due to Iran conflict, uncertainty over tariffs, relatively expensive valuations, AI-led decline in business prospects of the $280-billion technology industry.
FY26 is the second consecutive fiscal year of FII outflows and the fourth year in the past five years, data from ETIG showed. Last year, FIIs withdrew ₹1.24 lakh crore from stocks and are on track to withdraw the same amount this fiscal. But their exit accelerated in March after the start of the Iran war, with the rupee depreciating by 4% in as many weeks. “From March, the war in West Asia added to the risk-off sentiment which widened the selling significantly,” said Rupen Rajguru, head of equity investment and strategy at Julius Baer India.
Domestic hunger
“A weak currency is a major factor that is eating into foreign investor returns and keeping foreign capital at bay this year,” Rajguru said.
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Inflow of domestic institutions led by mutual funds, pension funds and insurance companies into the stock market has been on an uptrend over the past five years. Their FY26 investments of ₹8.49 lakh crore exceeded the total inflows into equities in the previous two fiscal years, underlining the domestic appetite for stocks despite the market sell-off.
Nifty and Sensex fell 5.1% and 7.1% respectively in the financial year. Both indexes would have ended marginally higher or with modest losses but for a nearly 9.5% retreat in March — the worst monthly decline since 2020, the start of the pandemic.
“Usually, a one-year loss triggers domestic outflows, but this time, SIP (systematic investment scheme) inflows have remained largely stable despite 18 months of losses,” Rajguru said.
Retail investors invested an average of ₹ 29,000 crore per month in domestic equity schemes in the last financial year. The return of foreign portfolio inflows to India in the new financial year will depend on a stable rupee, calm in West Asia and lower crude prices, though an influx of foreign investment seems unlikely.
Rajesh Iyer, Managing Director, Global Investment Solutions and Asset Management at LGT Wealth India said, “Given the uncertainties posed by energy disruptions and the global reversal of the interest rate cycle, FPI inflows are not expected to turn positive immediately in the near future.”
Foreign institutional ownership of Indian companies is at a decade low, and valuations are around 17 times the estimated price-to-earnings (PE) ratio, below the ten-year average, Julius Baer India’s Rajguru said. “A lot of damage has already been done,” he said.
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