Record FII outflows hit D-Street
Foreign institutional investors (FIIs) carried out their largest sell-off in the Indian stock market in March, as the country remains especially vulnerable to rising crude oil prices amid the escalating conflict in the Middle East.
In the cash segment, FIIs have sold equities worth ₹1.22 lakh crore for the month of March, which has been the highest ever selling on a monthly basis. This kind of selling was last seen in October 2024, when FIIs offloaded Indian stocks worth ₹1.14 lakh crore.
FIIs were net sellers on every single trading session in March, which tells you this was not tactical profit-booking but a structural reallocation away from India and emerging markets more broadly, said Sachin Sawrikar, Managing Partner at Artha Bharat Investment Managers
What’s weighing on FII sentiment?
The Middle East crisis has created a perfect storm of rising crude oil prices, depreciating rupee and high bond yields, which has spooked FIIs.
Additionally, due to higher oil prices, the US Fed may increase interest rates in the near term, contrary to earlier expectations of a rate cut, said Nandish Shah, AVP–PCG Research and Advisory (Fundamental), Wealth Management, Motilal Oswal Financial Services. This, in turn, reduces the appeal of emerging markets like India.
Shah added that FII holdings in the Nifty 500 would likely have come down further in the quarter ended March 2026, from a 10-quarter low of 18.4% in December 2025.
“We had seen earnings recovery for the December 25 quarter, and some green shoots were visible. However, with the increase in oil prices and issues with supply chains, there are chances that the earnings recovery might take longer than the earlier expectation,” he opined.
FII outflows likely to persist
Analysts don’t see any meaningful reversal in FII flows till the first half of FY27.
“FII selling is likely to persist in H1FY27 as fundamentals realign to the change in economic variables post the geopolitical disruption in the Middle East. Estimates still factor in an 11-12% earnings growth for the Nifty, which is likely to be cut. Thus, downside risk persists for the Nifty and thus makes the market unattractive from an FII perspective,” said Vishad Turakhia, CEO – Equirus Securities.
Lack of any policy initiative to address what FIIs are actually experiencing: a depreciating rupee, falling markets, and capital gains tax computed in rupees while they measure returns in dollars, is also compounding their aversion to Indian stocks.
Sawrikar opines that this combination is a perfect storm for a foreign investor; your asset falls in value, your currency falls, and your net dollar return is getting crushed from both ends.
“This is the worst-case scenario for an FPI sitting in New York or London deciding where to allocate next. Until the government actively engages with the foreign investment community, whether through credible rupee support, clearer capital gains treatment, or direct outreach, we will continue to lose ground to markets like Taiwan, South Korea, and even China, which are actively competing for the same capital,” he added.
Retail investors cushion market fall
The massive selloff on Dalal Street has pushed Nifty 50 almost 11% lower in March, its worst monthly fall in six years. The decline could have been steeper in the absence of buying from mutual funds. Data shows that MF cash inflows in the last one month are over ₹75,000 crore, providing some cushion to the overall market.
SIP inflows have remained healthy at ₹30,000 crore a month even though Nifty 50 returns in the last two years have been nearly nil.
“Domestic institutional investors have absorbed the FII selling over the last 2-3 years. Flows from FII are more tactical and macro driven, while domestic flows are systematic and long-term in nature, which provide stability to the Indian markets,” said MOSL’s Shah.
He further noted that domestic investors were underweight equities in their asset allocation, which has started to gain weight, though we remain under-invested relative to other emerging markets.
SIPs giving easy exit to FIIs?
Is the newfound love for SIPs and equity investing from retail investors setting the stage for an easy exit for FIIs?
Sawrikar said that monthly SIP contributions of around ₹30,000 crore give domestic institutions the firepower to absorb FII selling in an orderly way, and DIIs did absorb ₹8.31 lakh crore of FII selling in FY26 alone. That, he said, has prevented a crash, but what it has not prevented is a sustained, painful drawdown.
He further added that India runs a structurally vulnerable current account. “Our dependence on oil and gas imports means that every time crude spikes, our import bill balloons and our current account deteriorates rapidly. In that environment, foreign portfolio capital is not a luxury; it is a necessary buffer. The quiet confidence that domestic retail investors will keep markets afloat is comforting in the short run, but it is not a strategy,” he opined.
Turakhia, however, does not see SIPs as an easy exit for FIIs but believes that without this cushion, the correction in the Indian market would be far steeper than what we are currently seeing.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
