While short-term portfolio capital pulled back in 2025, longer-term foreign investment remains steady. This crucial split signals that global investors aren’t abandoning India—they’re simply becoming more discerning in how they deploy capital, write Saumitra Bhaduri and Shubham Anand
l What’s driving the outflows?
THE EQUITY OUTFLOW in 2025 is best seen as a “push-pull” mix. Globally, high interest rates in advanced economies—especially the US—have lured investors toward safer dollar assets. When US bond yields rise, exposure to riskier equity markets is trimmed. On the home front, Indian equities entered 2025 trading at a premium to peers, reflecting optimism about growth and earnings. In an uncertain global environment, such premiums encourage profit booking and portfolio rebalancing.
Currency volatility adds another twist: the rupee’s slide past 91 to the dollar made a tactical retreat necessary for foreign institutional investors (FII), as a weaker rupee erodes dollar returns. This sets off a feedback loop: selling stocks leads to dollar outflows, which weaken the rupee further, prompting even more selling.
For foreign direct investment (FDI), softer net inflows in some months reflected higher profit repartition and greater outward investment by Indian firms, even as gross inflows into manufacturing, infrastructure, and services remained healthy. This explains why long-term investors have stayed engaged even as headline flow numbers appeared soft.
l Who’s stepping in to fill the gap?
FOREIGN PORTFOLIO INVESTORS (FPI) have been net sellers, withdrawing nearly `1.59 lakh crore, making 2025 one of the weakest years for equity portfolio flows since the pandemic. Foreign institutional investors (FII) ownership in NSE-listed companies has dropped to a 15-year low of about 16.7%. Yet, FDI has stayed resilient, with equity inflows in April-September 2025 rising 22% year-on-year to about $25 billion. Debt inflows have supported the market, buoyed by India’s inclusion in global bond indices such as the JPMorgan Government Bond Index.
Meanwhile, domestic institutional investors (DII) and retail investors have filled much of the void. Monthly systematic investment plan (SIP) inflows consistently cross `25,000 crore, and for every rupee FIIs sold, DIIs bought nearly `1.2 worth of shares.
l Is the trend shifting?
ENCOURAGINGLY, YES. RECENTLY, equity selling by FPIs has moderated, with some weeks of net buying as global bond yields softened and expectations grew that the US tightening cycle is ending. This suggests part of the earlier outflow was cyclical.
More importantly, debt flows have strengthened. India’s phased inclusion in global bond indices has started attracting steady foreign demand for government securities. These index-lined flows—estimated at $20-25 billion—provide a more durable anchor for foreign capital.
Meanwhile, robust participation by domestic mutual funds, insurers, and retail investors has absorbed much of the selling pressure in equities.
l What lies ahead?
ANY REVERSAL IN capital flows will likely be gradual. Typically, equity flows return when, first, global financial conditions ease; second, currency expectations stabilise; and third, earnings growth justifies valuations. While these conditions are not fully aligned yet, they are moving in that direction.
Importantly, DIIs have helped India decouple from global volatility in 2025. However, if FIIs continue to stay away, domestic investors could end up holding overpriced stocks.
Looking ahead, forecasts from the Reserve Bank of India (RBI), International Monetary Fund, and the World Bank remain cautiously optimistic. The RBI expects the current account deficit to stay near 1% of GDP, with stable FDI and rising debt inflows comfortably financing it. The IMF and World Bank highlight India’s robust growth prospects and ability to attract
long-term investment, while UNCTAD and CareEdge project a modest FDI recovery and a possible turnaround in foreign flows by FY2026, supported by bond index inclusion and a stable external balance.
l How foreign capital can return to India
FIRST, THE RBI must stabilise the rupee to create a more stable economic environment. Second, bond yields must fall for the right reasons, signalling genuine improvement rather than temporary relief. Third, equity valuations must become attractive—either via a price correction or strong earnings growth. Finally, the Securities and Exchange Board of India should monitor the surge in retail trading to ensure the domestic cushion is built on long-term investments, not speculation. In sum, foreign investment in India is being reshaped, not reversed. The push-pull dynamics of 2025 reflect global cycles more than domestic weakness, and as conditions improve, India is well-positioned for a more durable return of foreign capital.
Bhaduri is professor at Madras School of Economics while Anand is a PhD scholar at the same institute
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.