Foreign portfolio investors (FPIs) made their largest-ever annual exit from Indian markets in financial year 2026, withdrawing a record ₹1.53 lakh crore from equities and debt instruments, according to the Securities and Exchange Board of India's (SEBI) annual report.

The outflow marks the highest annual withdrawal by foreign investors since systematic records of FPI activity began, surpassing all previous fiscal years. SEBI, India's capital markets regulator, documented the unprecedented exit in its annual report, attributing the trend to persistent global uncertainty that influenced cross-border investment decisions. The record exit occurred against the backdrop of elevated US interest rates and a sustained strong dollar, factors that have historically encouraged capital to flow back toward developed markets and away from emerging market equities.

Despite the broad-based withdrawal, debt investments demonstrated relative resilience compared to equities, suggesting that foreign investors maintained selective interest in India's fixed-income instruments even as they reduced overall exposure to Indian markets. India's phased inclusion in major global bond indices, which began with the JP Morgan Government Bond Index-Emerging Markets in mid-2024 and was followed by Bloomberg Index inclusion in early 2025, has incrementally expanded the universe of index-tracking passive flows into Indian government securities, providing a structural counterweight to active outflows.

FPIs, which include foreign institutional investors and qualified foreign investors, are a significant source of liquidity in India's capital markets. Their investment patterns are closely monitored by SEBI as an indicator of international confidence in the Indian economy and are tracked through monthly data published by the regulator and depository participants. In recent years, however, the influence of FPI flows on market direction has been partially offset by the growing participation of domestic institutional investors—particularly mutual funds and insurance companies—whose systematic investment plan (SIP) contributions and allocation flows have steadily increased, reducing the market's traditional sensitivity to foreign capital movements.

The record outflow in FY26 contrasts with several previous fiscal years in which FPIs had been net purchasers of Indian equities, contributing to the growth of domestic stock markets. The shift reflects broader challenges faced by emerging markets as global investors navigated uncertain macroeconomic conditions, including geopolitical tensions, supply-chain recalibration, and divergent monetary policy paths among major central banks. Whether the outflow trend sustains or reverses will depend in part on the trajectory of US Federal Reserve policy, the pace of China's economic recovery, and the relative attractiveness of Indian equity valuations compared with other emerging market destinations.

Source: CNBC-TV18 Markets