Heavy FPI outflows driven by global uncertainty, currency volatility and high valuations, while debt markets attract strong foreign interest
Foreign portfolio investors exited Indian equity markets in 2025 on an unprecedented scale, withdrawing nearly Rs 1.6 lakh crore, or about $18 billion, marking the worst year for equity flows on record. Volatile currency movements, global trade tensions including the threat of higher US tariffs, and elevated market valuations significantly weakened risk appetite among overseas investors.
Global factors played a major role in shaping investor behaviour. Rising US bond yields, a stronger dollar and lingering geopolitical uncertainties redirected global capital towards developed markets, reducing allocations to emerging economies such as India. Persistent depreciation of the rupee further eroded dollar-based returns and increased hedging costs, diminishing India’s short-term appeal for foreign investors.
Despite the sharp sell-off, market participants remain optimistic about a turnaround in 2026. Analysts expect foreign portfolio investors to return as India’s nominal growth and corporate earnings improve. A potential trade agreement between India and the United States could reduce tariff-related concerns, while anticipated rate cuts by the US Federal Reserve may soften the dollar, creating a more favourable environment for emerging market assets.
Domestic factors are also expected to support a revival in foreign flows. Strong relative earnings growth, policy continuity and reform momentum, particularly around the Union Budget, could act as catalysts for renewed investor confidence. However, experts caution that global macroeconomic developments, including the pace of interest rate cuts and evolving trade policies, will continue to influence capital flows.
Data from depositories show that foreign investors pulled out Rs 1.58 lakh crore from Indian equities in 2025, even as they invested more than Rs 59,000 crore in the debt market by December 26. This made 2025 the worst year for equity outflows, surpassing the previous record set in 2022. In contrast, 2023 had witnessed strong equity inflows, highlighting the sharp reversal in sentiment.
Analysts attribute the equity sell-off to a combination of global and domestic pressures. High US interest rates improved risk-free returns in developed markets, prompting capital rotation and strengthening the dollar. On the domestic front, stretched valuations in certain sectors led to tactical profit-taking rather than a reassessment of India’s long-term growth prospects.
Monthly data reflected this volatility, with foreign investors selling equities in eight out of twelve months during the year. Selling pressure was largely offset by robust buying from domestic institutional investors, supported by rising systematic investment plan inflows from retail participants.
While equities saw heavy withdrawals, foreign investors showed a clear preference for Indian debt. Net investments of around Rs 59,000 crore flowed into the debt market, driven by India’s inclusion in global bond indices, attractive yield differentials and portfolio rebalancing amid equity market volatility. The phased inclusion of Indian government bonds under the Fully Accessible Route generated steady demand from passive global funds.
Sector-wise, financial services and information technology witnessed the highest outflows due to concerns over US economic growth, a weak capital expenditure cycle and margin pressures. In contrast, healthcare, utilities and manufacturing attracted inflows, supported by long-term themes such as infrastructure expansion and policy-led manufacturing incentives.
Overall, foreign investors began 2025 on a weak note and remained cautious through most of the year due to adverse global cues. Although a sustained recovery eluded equity markets, expectations of easing global financial conditions and improving domestic fundamentals continue to support the outlook for a meaningful revival in foreign equity inflows in 2026.
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