It has been discussed enough that FPIs are selling Indian markets and investing elsewhere, and the following table only illustrates that they have been wise in doing so. Depreciation of the Indian Rupee against the US Dollar has added more pain to the dollar returns of foreigners who have invested in Indian markets.
A close look at the texture of FPIs selling indicates they, for now, are not bullish on the technology and consumption story of India, as most of their selling has been in sectors like IT, FMCG, Power, Consumer Durables and Healthcare. Their exposure to BFSI is maximum, which is in line with the weightage the space carries in our markets. They were marginal sellers in it.
Domestic institutional money is driven by retail participants, and hence we are witnessing a gush of liquidity coming into markets from DIIs, especially into mutual funds. There too, the concentration of funds is in Flexi cap, Midcap and Small cap funds. Combining all, retail money is largely flowing into the mid and smallcap space. As the market consolidates due to valuation metrics well ahead of earnings trajectory, the money-making ideas are not easy to find in the secondary market. This, in turn, is pushing domestic liquidity into the primary market, which in turn is fueling the IPO market. This has been the story of 2025.
Year 2026 may turn out to be challenging in the absence of a major capital expenditure announcement by the government, and if credit offtake growth doesn’t shoot above 9-11% which we believe it may not. The best-case scenario for the market appears to be consolidation for a few more quarters, which will bring the market into an inexpensive valuation zone. This may bring FPIs back into our markets as underperformance to other global markets, valuation comfort and depreciated currency would be the right combination for them to invest. We are already witnessing a declining pace of their sales. The major risk to this best-case scenario would be a rise in retail loan delinquencies due to stress in a certain section of the economy. This can lead to FPIs reducing their exposure in the scared space called banking, which eventually may lead to a correction in the market, and that makes it our worst-case scenario.
The fund flow into domestic institutions may be put to the test in 2026. If next year too turns out to be a year of no or low returns, then we may see some reversal of liquidity, and if it couples with a correction, then it may lead to further change in direction of the liquidity. However, if this happens, FPIs may stand at the other end to absorb this shock. It will be prudent to factor in that this shock absorber will be mainly in the large cap space. In this backdrop, we believe the equity portfolios for 2026 should have more weightage in large caps. Exposure in mid and small caps should be considered at dips on a selective basis.
(The author is Head – Institutional Research, Asit C Mehta Investment Intermediates Limited)