Foreign investors withdraw record Rs 1.6 lakh crore from Indian equities in 2025

Foreign investors exited Indian equities in 2025 at an unprecedented scale, pulling out a record Rs 1.6 lakh crore (about USD 18 billion), as volatile currency movements, global trade tensions and elevated valuations weakened risk appetite. Despite the sharp outflows, market participants expect foreign portfolio investor (FPI) flows to turn sustainably positive in 2026.

Analysts said rising US bond yields, a stronger dollar and geopolitical uncertainties pushed global capital towards developed markets, leading to reduced allocations to emerging markets such as India. Concerns over potential US tariffs and ongoing global trade tensions also weighed on sentiment through the year.

“We expect FPIs to return sustainably in India as nominal growth and earnings pick up in CY26. Closure of the trade deal with the US should narrow tariff differentials, while Fed rate cuts will keep the dollar soft, favouring emerging-market assets,” said Garima Kapoor, deputy head of research and economist at Elara Securities India.

Domestic factors are also expected to support a revival in foreign flows. Indian earnings growth relative to peers, policy continuity and reforms, particularly around the Union Budget, could act as key triggers, said Vikas Gupta, CEO and chief investment strategist at OmniScience Capital.

However, uncertainty on the global macro front is expected to continue influencing FPI behaviour. “The trajectory of global interest rates, especially the timing and pace of rate cuts, along with developments on tariffs, will be key drivers,” said Himanshu Srivastava, principal manager–research at Morningstar Investment Research India. He added that a moderation in US bond yields and a softer dollar could further support a recovery in equity inflows.

As per data available with the depositories, foreign portfolio investors have withdrawn Rs 1.58 lakh crore from Indian equity markets in 2025 so far, while investing over Rs 59,000 crore in the debt market till December 26.

This makes 2025 the worst year for equity flows, surpassing the previous record outflow of Rs 1.21 lakh crore in 2022. The year follows a marginal net inflow of just Rs 427 crore in 2024, while 2023 had seen a strong equity investment of Rs 1.71 lakh crore.

Analysts attributed the sharp outflows to a combination of global and domestic pressures. “Persistently high US interest rates and elevated bond yields improved risk-free returns in developed markets, prompting capital rotation and strengthening the dollar, tightening financial conditions for emerging markets,” Srivastava said.

He added that phases of rupee depreciation further eroded dollar-based returns and raised hedging costs, reducing India’s risk-adjusted appeal. These pressures were compounded by geopolitical uncertainties, including concerns over energy prices, supply-chain disruptions and trade-related tensions.

On the domestic front, elevated valuations in certain segments led to tactical profit-taking, said Sorbh Gupta, head–equity at Bajaj Finserv Asset Management. He added that these moves reflected short-term adjustments rather than a reassessment of India’s long-term growth prospects.

The monthly flow pattern highlighted this volatility, with FPIs selling equities in eight of the 12 months in 2025. Net buying was limited to April, May, June and October.

The equity sell-off by FPIs was cushioned by strong buying from domestic institutional investors, supported by rising Systematic Investment Plan (SIP) inflows from retail investors.

In contrast to equities, FPIs showed a clear preference for debt, investing a net Rs 59,000 crore in Indian debt during 2025. This was driven by India’s inclusion in global bond indices, attractive yield differentials and portfolio rebalancing amid volatile equity markets.

The phased inclusion of Indian government bonds under the Fully Accessible Route (FAR) in indices such as the JP Morgan Global Emerging Markets Index created steady demand from passive funds, Srivastava said.

According to OmniScience Capital’s Gupta, FPIs likely booked gains in equities and rotated part of the capital into debt under the FAR framework to lock in higher interest rates. “It is clear that we are in for a rate-cutting cycle and Debt FAR offers locking in higher interest rates with an upside from capital gains when the cuts happen,” he said.

Sectoral trends reflected these shifts. Financial services and information technology recorded the highest outflows amid concerns over US growth, a weak capital expenditure cycle and pressure on net interest margins. In contrast, healthcare, utilities and manufacturing attracted inflows, supported by long-term themes such as infrastructure development and the production-linked incentive (PLI) programme.

FPIs began 2025 on a weak footing, withdrawing over Rs 78,000 crore in January amid rupee depreciation, rising US bond yields and expectations of a muted earnings season. The sell-off continued through March, with total outflows of Rs 1.16 lakh crore in the first three months as global trade tensions escalated.

Although FPIs returned with net investments of Rs 38,600 crore between April and June, the recovery proved short-lived. Selling resumed from July to September. After a brief return in October with net investments of Rs 14,610 crore, FPIs again turned net sellers in November and December amid weak global cues.