Despite a recent ceasefire in West Asia, foreign institutional investors (FIIs) are unlikely to reverse their significant selling trend in the Indian equity market anytime soon, according to market experts at Ambit Institutional Equities. FIIs have already offloaded a staggering $29.8 billion from India's equities till June 24, 2026, surpassing the $18.9 billion sold throughout 2025.
Why Foreign Investors Are Exiting
Several factors are contributing to this persistent outflow. Bharat Arora, Director of Strategy at Ambit Institutional Equities, noted that while the worst spell of selling might be over, a strong return of FIIs is not expected. The initial drivers included uncertainty surrounding US import tariffs in 2025, followed by geopolitical tensions stemming from the US war on Iran this year, which raised concerns about its impact on oil-import-dependent economies like India.
However, beyond these geopolitical shifts, more fundamental reasons are at play. A significant amount of global capital has chased artificial intelligence (AI) related investment opportunities in markets such as South Korea, Taiwan, and the US. India, with its limited listed AI opportunities, has largely missed out on this 'gold rush'.
Valuations and Earnings Concerns
Another critical factor is India's market valuations. "Even at this moment, the risk-reward proposition is quite unattractive. If you look at major emerging markets, your indices are trading at 20 times on trailing basis, the multiples are not that cheap, especially if growth slowdown happens," Arora explained. This unattractive valuation is compounded by lackluster corporate earnings and a potential downside risk to earnings should the economy decelerate. Ambit Institutional Equities projects a downside risk to the consensus forecast of 15% earnings per share growth for FY27.
Despite the heavy FII selloff, the NSE Nifty 50 index has declined only 7.50% year-to-date in 2026. This contrasts sharply with other major global markets: the US S&P 500 is up over 7%, Taiwan's Weighted Index has surged more than 57%, and South Korea's Kospi index has more than doubled in the same period.
Domestic Support and Future Outlook
The Indian market's resilience has largely been attributed to strong domestic money supply, particularly robust inflows from domestic institutions and mutual funds, with SIP (Systematic Investment Plan) flows remaining strong at Rs 30,954 crore in May. Nitin Bhasin, Head of Institutional Equities at Ambit Capital, highlighted that India is now a "discovered market," yielding lower compound annual returns (8.1% in rupee terms, less than 5% in US dollar terms over the last five years) compared to earlier decades.
Ambit also points to external shocks as a permanent structural risk, with the West Asia conflict expected to contribute to an economic slowdown in Q1 FY27. Additionally, El Niño conditions could dampen household sentiment and discretionary consumption. These domestic uncertainties and external shocks are also keeping private investments on the sidelines, suggesting more market correction might be ahead.
AI's Impact on IT and Rupee Pressure
Concerns over how AI could disrupt previously favored sectors, like Indian IT, are also deterring FII interest. Ashwin Mehta, Head of Equity Research for Technology at Ambit, warned that AI poses a risk to the core services of IT companies, potentially leading to a 15-20% revenue deflation over 3-4 years. Furthermore, a depreciating rupee continues to weigh on FII sentiment, impacting their US dollar returns. While RBI and government measures aim to attract capital, sustained pressure on the rupee is expected until FDI outflows reverse or gross FDI inflows significantly pick up.