It appears that overseas investors are losing confidence in Asia’s third-largest economy, as reflected in their resumption of selling in domestic stocks, with investors seemingly finding better opportunities elsewhere.
Foreign portfolio investors turned net sellers again in September, selling ₹35,860 crore worth of stocks, according to NSDL data. The latest selling came after FPIs invested ₹20,200 crore in July and ₹29,631 crore in August.
With the September outflows, total FPI withdrawals from Indian equities in 2026 have reached ₹2.69 lakh crore, surpassing the ₹1.66 lakh crore outflow recorded during the whole of 2025.
The record outflows have clearly been visible in the Nifty 50’s performance, with the index logging double-digit losses in 2026, falling over 14% so far and remaining on track for its first annual decline in 15 years.
The gauge has remained lower for the last eight straight weeks, with the last similar losing streak occurring 25 years ago, reflecting the deepening pressure on the broader market. If not for the support from the domestic mutual funds, the fall would have been even more severe.
Barring stocks, the heavy selling has added more pressure to the Indian rupee, which has registered multiple record lows and turned into one of Asia’s worst-performing currencies. The local currency has also been affected by elevated crude oil prices, global bond yields, and strong dollar demand.
In addition to equity, FPIs also turned into net sellers in the debt (general limit) at ₹5,247 crore, in debt (VRR or Voluntary Retention Route) at ₹5,049 crore, in debt (FAR or Fully Accessible Route) at ₹10,431 crore, and in hybrid at ₹2,078 crore.
Taiwan and South Korea also see foreign outflows
Besides, frontrunners in the AI trade, Taiwan and South Korea, are also seeing outflows after attracting money in August, as per media reports. The reversal in the East Asian markets follows an improvement in foreign demand earlier in the quarter.
Earlier, global brokerage firm Bernstein highlighted that large Indian companies are facing increasing pressure to reinvent their businesses as emerging technologies disrupt traditional business models, giving foreign investors fewer reasons to maintain their exposure to some of the country’s biggest corporates.
With no local champions in artificial intelligence and the IT services industry facing the brunt of AI advancements, India is widely seen as an anti-AI trade.
However, Bernstein pointed out that even if the global AI trade weakens, India is unlikely to see any major reversal of foreign capital flows.
“It would be a folly to think that it’s just a matter of time, and once the AI trade settles and the Middle East crisis resolves, foreign money is just waiting to be parked in India,” Bernstein said.
Higher treasury yields make Indian assets less attractive
Apart from low AI exposure, expensive valuations, and challenges arising from higher crude oil prices, rising global bond yields are also making it harder for India to attract overseas capital.
The higher returns available on Treasuries are particularly relevant for India because US-based investors account for the largest pool of foreign portfolio equity assets. Following the Fed rate hike, the odds of another quarter-point rate hike in October have strengthened.
Rupee weakness and the cost of hedging against further declines also erode dollar returns on Indian assets. Meanwhile, rising bets on interest-rate hikes by the central bank are adding to unease over the growth outlook for both bond and stock investors.
Although the latest equity sell-off has brought valuations into the comfort zone, it remains expensive. MSCI Inc.’s broader gauge of Indian equities still trades at a premium to Asian equities despite heading for its worst year since 2011.
Disclaimer: We advise investors to check with certified experts before making any investment decisions.
