Shareholding pattern data for the third quarter shows FIIs sold 814 stocks and bought just 478 across Nifty, midcaps and smallcaps — translating to 1.7 stocks sold for every one bought.
The damage has been most severe in smallcaps. Within the BSE Smallcap index, FII holdings fell in 701 stocks while rising in just 400. The BSE Smallcap index is already down about 10% in 2026.
FII selling was higher in smallcaps, while largecaps and midcaps show controlled but consistent trimming.
Among Nifty50 stocks, FII holdings dropped in 33 names while increasing in just 17. IndiGo saw FII stakes plunge 345 basis points to below 25% in the third quarter. Eicher Motors saw foreign holdings slide 280 bps to 36.24% in December. Tech Mahindra, Shriram Finance, Dr. Reddy’s Laboratories, ICICI Bank, ITC, Trent and HDFC Bank also saw FII selling.
FIIs raised their stake in Bharti Airtel to 28.75%. Asian Paints, SBI, Tata Motors, L&T, ONGC and Reliance Industries also saw buying.
Within the BSE Midcap 150 index, FIIs sold 80 stocks and bought just 61. ITC Hotels, Crompton Greaves, Tata Elxsi, Container Corporation, Delhivery, PB Fintech, Kaynes and APL Apollo Tubes saw FII selling. IDFC First Bank, Nalco, Bank of Maharashtra, AU Small Finance Bank and Bank of India saw stake increases.
In smallcaps, FII selling hit Entero Healthcare, Quess Corp, SpiceJet, Apollo Micro, CarTrade, KEC, Amber, Raymond and City Union Bank. Knowledge Marine, Utkarsh Small Finance, RBL Bank, Jamna Auto and Jana Small Finance Bank saw FII buying.
The Sensex is down around 4% in 2026 while midcaps have fallen roughly 6%. FII selling is due to relatively high valuations in India, modest earnings growth and continuing weakness in the rupee.
“The correction has improved risk-reward in parts of the mid- and small-cap space, but selectivity is critical,” said Rajesh Palviya, Head of Research at Axis Securities. “While valuations have cooled, many stocks are still priced for perfection. A phased approach makes sense — focusing on high-quality businesses where earnings can catch up over time, rather than aggressive, broad-based exposure.”
“Earnings growth over the next two years is likely to be led by a mix of cyclical recovery and structural themes,” Palviya added. “Banking and financials, autos, cement, telecom, select consumption plays, and infrastructure-linked sectors are well positioned. What will differentiate performance is balance-sheet strength and the ability to convert demand into sustained earnings growth.”
Joanne Goh, Senior Investment Strategist at DBS Bank, said: “Valuations in India remain elevated, trading at around 1SD (or more) above the 13-year PE historical average. The combination of softer earnings momentum and rich valuations has reinforced foreign investors’ caution, contributing to significant outflows in 2025 as they rotated toward lower-valued emerging markets and AI-concentrated markets. We believe a more durable recovery in foreign investor inflows will likely depend on solid corporate earnings delivery and clarity on US tariffs.”
“Looking ahead into 2026, we anticipate a gradual improvement in India’s earnings outlook,” Goh said. “This is underpinned by the full transmission of 2025 policy measures, including GST cuts, the RBI’s interest rate reductions by 125 bps, increased credit availability, and recent bank deregulations—all of which support economic growth and domestic demand-centric sectors.”
DBS remains constructive on India’s consumer sector and banks. “Banks, a key component of India’s equity market, offer strong structural characteristics, benefiting from an improved credit environment, with healthy asset quality, manageable credit costs, and comfortable capital adequacy. Balance sheets particularly among large private-sector banks, are well-positioned to support loan growth across retail, MSMEs, infrastructure, and manufacturing, consistent with India’s investment-led growth trajectory,” Goh said.
Karthik Kumar, Fund Manager at Axis Mutual Fund, said: “Markets in 2026 will likely be shaped by three forces: policy support, consumption recovery, and capex execution. Continued public capex momentum — particularly in railways and defence — is expected to support industrials and capital goods. Meanwhile, income‑tax changes and GST rationalisation are expected to normalise consumption trends, supporting discretionary sectors. Financials should continue to benefit from improving credit demand in a benign rate environment.”
“Global cyclicality means export‑linked sectors such as IT could show select strength as GenAI initiatives and global tech spending stabilise into FY27,” Kumar said. “These shifts underline a year where sector leadership will not be uniform — making systematic sectoral breadth valuable.”
(Data: Ritesh Presswala)
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