2025 is nearing its end, and there are just 15 days left. Though the benchmark indices have hot fresh lifetime highs and the GDP has shot up well over the 8% mark, one nagging worry for the markets has been the consistent FII selling. Starting January to December so far, FIIs continue to be net sellers in most months. So far the net sell number for 2025 stands at over Rs 3 lakh crore.
The big question is why has the FII selling not stopped in India? FinancialExpress.com caught up with Nilesh Shah, managing director at Kotak Mahindra Asset Management Company in an exclusive conversation to understand what’s been driving the FII outflows and the expectation for the markets in 2026.
3 reasons why FIIs selling in India continued through 2025
Here are three concerns that has weighed on FII sentiment for the better part of 2025 –
#1 Selling India a profitable proposition
One of the key reasons, according to Nilesh Shah, why the pace of FII selling in India did not pause is the profitability aspect, “more importantly, in India, they had profit. In most emerging markets, they were sitting on losses. So, they could only book profit where it is there. In India, there was an exit. They could sell and take money out. If they try doing that stunt in China, the money may not be allowed to be taken out. So, there was an exit, there was a valuation premium, and there was slowing earnings growth. They took the opportunity.”
He went on to explain what justified the strategy too, “if I look at it from FII side, our valuations were trading at a premium to other emerging markets. They found it expensive. They also forecasted earnings growth slowing down. We were trading at 23-24 times forward with earnings growth in mid single digits. Obviously, there was a worry.”
#2 The big valuation gap finally narrowing
India’s valuation Vs EM peers has been a consistent source of worry for the markets. India has been trading at a substantial premium to our historical average valuation as well as to its peer group’s average valuation.
However, Shah explained that “now, we have come down to averages compared to our historical average, we are around them compared to our premium to our Emerging Market peers, we are around averages. So, the excess valuation has been corrected over the last one and quarter-year of underperformance.”
But what is the expectation from Indian markets going forward? Shah pointed out that “India still remains one of the cheapest emerging markets on a long-term basis. Our earnings growth could be in double digits. Very few markets will be able to deliver that kind of earnings growth.”
#3 Double digit earnings growth on the anvil
Earnings have been a worry for India for most of FY26, with worries about slowdown. Going forward, Nilesh Shah says “we are looking at low double-digit earnings growth for Nifty 50 companies; mid-caps will do slightly better than that. The sectors which will lead corporate earnings growth will be related to the consumer side, consumer discretionary space, banking and financial services, automobiles, these are the sectors which should lead earnings in calendar year 2026.”
The market outlook for 2026
The most important factor to watch out for in 2026 is the expectation for the markets going forward. Shah is optimistic about the markets. He explained that “last year earnings growth was not visible, this year earnings growth is visible, after six quarters of single digit earnings growth, we think next quarter and subsequently it should be double-digit earnings growth. Earnings growth will be reflected into the returns of investors.”
He concluded the conversation on an optimistic note explaining that our “whatever is earnings growth of low double-digit that should be returned to investors in calendar year 2026.” Will that lead to some change in stance for FIIs? We will have to wait and watch the trend.