Foreign Investors Pull Out ₹1.6 Lakh Crore from India: What’s Behind Their Reluctance?

Mumbai: As 2026 begins, global investors appear to be steering away from India, despite the country being one of the world’s key emerging markets. So far this fiscal year, foreign institutional investors (FIIs) have net sold ₹1.6 lakh crore in Indian equities, raising questions about the reasons behind this pronounced pullback.

India Losing Its Appeal
While investors from the U.S. and Taiwan have shifted capital toward AI-focused opportunities and other emerging markets, India remains largely “off the preferred list.” After a challenging 2025, when India witnessed one of its weakest years for foreign inflows, FIIs pulled out substantial funds due to expensive market valuations and corporate earnings that have underperformed expectations.

For perspective, the MSCI India Dollar Index trades at a P/E multiple of 26x, compared to 17x for the MSCI Emerging Markets Index and 23x for the MSCI ACWI Index, making Indian equities relatively expensive for foreign investors.

Impact of Tariffs and Global Trends
Rajani Sinha, Chief Economist at CareEdge Group, told ET, “Currently, FIIs are more influenced by tariffs and sector trends than by India’s macroeconomic health. The uncertainty over U.S. tariffs has pushed investors toward growth themes like AI, electronics, and semiconductors.” She noted that a potential trade agreement between India and the U.S. could boost FII inflows in the medium term, but sector-specific global considerations will continue to influence investment decisions.

Sanjeev Prasad of Kotak Institutional Research added that despite India’s strong performance over the last five years, the market has lagged behind global peers in the past year. MSCI India delivered 4.29% returns over the past year, compared to 10.75% annualized over five years, while MSCI Emerging Markets returned 34% in the past year.

Where the Money Is Flowing
In 2025, U.S.-based ETFs like iShares and Vanguard S&P saw massive investments of $79 billion, largely concentrated in AI, electronics, and semiconductor companies. Over the past year, roughly $38.9 billion flowed into emerging markets via ETFs. The MSCI Emerging Markets ETF saw a 34% rise, with China, Taiwan, and India accounting for 28%, 21%, and 15% of the index, respectively. Notably, HDFC Bank and Reliance Industries have minimal weights in these global indices, at 1% each.

AI Investments Drive Global Capital
Global AI-focused capex is expected to rise from $400 billion in 2025 to $527 billion in 2026, according to a Goldman Sachs survey. However, India remains largely excluded from this capital surge due to high valuations. Analysts expect FIIs to monitor quarterly earnings and market trends before returning, despite the positive medium-term outlook.

Signs of Optimism for India
Despite current headwinds, several analysts remain optimistic about India’s prospects. Motilal Oswal’s recent report projects that Q3 FY26 earnings will be the strongest in eight quarters, with 16% annual PAT growth expected across the covered universe. Excluding oil marketing companies, healthy annual growth of 13% is anticipated in banking and technology sectors. The report predicts a broad-based recovery, with double-digit growth expected across 20 sectors, signaling the end of the earnings downturn that began in FY25.

In short, while FIIs are cautious in the short term, India’s strong fundamentals and improving corporate earnings may gradually lure foreign capital back into the market.