The last week saw the transition of the calendar year. 2026 began with the Nifty hitting fresh lifetime highs, but one aspect that saw no change was the FII selling trends. After closing 2025 with record outflows by FIIs. They net sold equities worth over Rs 3 lakh crore last year, and the selling is continuing in January so far.
Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments said, ‘This (2025 trend) is the worst selling by FIIs since they started investing in India. In 2024 also FIIs have been selling through the exchanges. They sold equity for Rs 1,21,210 crores. However, for the year as a whole, the net FII inflow was positive since they had invested Rs 1,21,637 crores through the primary market. But for 2025, the net sell figure is a massive Rs 1,66,283 crores.
The relatively elevated valuations in India and the ‘AI trade’ were the principal factors that pushed the FIIs to sell mode in India.”
Can the FII selling pause in 2026?
As the new year enters its second week, one big question doing the rounds across market circles is when will FII selling pause. Let’s take a look at the reasons why the FIIs have been continuous sellers and how the factors are expected to pan out going forward this year.
Earnings outlook improving
The earnings outlook has significantly improved as India readies for the Q3 results. Most analysts hint at profitability improving for corporate India over the next few quarters. Most big brokerages expect returns in mid-teens for India. Sanjeev Prasad, MD, Kotak Institutional Equities, in an exclusive conversation with FinancialExpress.com highlighted that he hopes for at least 15% earnings growth next fiscal, “more confident about the earnings numbers coming through for a change.” According to him, if it is “not the 18% that we’re looking at, it could still be in the ballpark of about 15% or so. This compares with about 7% for FY26. So that’s a decent recovery. And second, the more important point is that it is very broad-based.”
VK Vijaykumar also reiterated that “significant improvement in India’s fundamentals is likely to attract net FII inflows in 2026. Robust GDP growth and prospects of improvement in corporate earnings in 2026 augur well for positive FII flows in 2026.”
The valuation worry
Valuation has been a key concern for foreign investors too. India still continues to be relatively more expensive than peers. Despite the significant correction seen, India’s relative valuation is seen as significantly higher compared to other Asian peers like Korea, Taiwan and China.The current valuation appears expensive at 20.3x, which is marginally above the 3-year average. FIIs shifted to other EMs amid India’s premium valuations and lack of AI opportunities. However, with the earnings trajectory seeming to improve and expected to be broad-based, it needs to be seen how this impacts the FII sentiment and India’s relative appeal compared to other EM peers.
Rupee-dollar drama
The rupee too has been under pressure as a result of the FII flows. “The sustained selling by FIIs have contributed significantly to the sharp depreciation of 5 percent in the rupee vs the dollar in 2025. The year 2026 is likely to witness some changes in the FII strategy,” added Geojit’s Vijayakumar.
What’s made the challenge even greater is the dollar’s relative strength. The Dollar Index showcased significant strength in the last 3 months, hovering close to the 99 level. Even Kotak’s Sanjeev Prasad believes that, “if the rupee starts coming back to some extent, that could at least take away one of the worries that foreigners probably have at this point in time.”
The rupee after closing 2025 as one of the worst-performing currencies globally, has started 2026 on a relatively muted note. Can the improvement in macros and earnings upgrade add strength to the rupee? That’s something that the street will wait and watch out for.
Overall FII inflows are expected to be a function of improving macro and earnings outlook. The relative stock market performance and the currency’s movement are interlinked too. With the earnings outlook improving, many market observers expect some improvement in the FII sentiment.