Record foreign selling capped the rise in India’s share market in 2025 even as the benchmarks scaled fresh highs after a 14-month rally, underscoring a growing divergence between the behaviour of global and domestic investors.
Foreign portfolio investors sold about 1.6 trillion rupees ($18 billion) of shares during the year, the highest annual outflow on record, on stretched valuations, subdued earnings, geopolitical worries and concerns over steep U.S. tariffs on Indian exports.
Information technology stocks, which accounted for nearly half of the outflows, bore the brunt of the selloff, falling 11.7%, as subdued client spending and macroeconomic uncertainty in the U.S., a key market, hurt demand.
“Elevated valuations, weaker earnings visibility in the first half of calendar year 2025 and tariff uncertainties were the key drivers of foreign selling,” said Siddhartha Khemka, head of research for wealth management at Mumbai-based financial services firm Motilal Oswal Financial Services.
India could regain favour among global investors in 2026 as valuations ease, earnings stabilise, and the economic growth outlook stays intact, Khemka said.
Garima Kapoor, an economist at Elara Capital, expects a revival in inflows in the March quarter amid accelerating public capital expenditure, easing inflation, potential progress on a trade deal, and U.S. rate cuts.
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In 2025 so far, Indian benchmark indexes Nifty 50 and Sensex have risen about 10% each, underperforming their Asian and emerging market peers, even as robust local buying has cushioned the impact of foreign selling and helped the market during bouts of volatility.
India’s valuation premium relative to EM peers is now back to its historical average, according to HSBC Mutual Fund.
“With better earnings growth in fiscal year 2027 and a potential trade deal with the U.S., we expect to see a return of FII investors into India in the coming year,” the global asset manager said.
Total domestic institutional inflows in 2025 have amounted to a record high of $86 billion as of December 26, as per provisional data by the NSE.
By the September quarter, foreign ownership of Indian equities slipped to a 15-year low of 16.9% from 17.4% at the end of 2024, while domestic mutual funds’ holdings have climbed to a record high of 10.9% from 10% at 2024-end, according to NSE data, highlighting a shift in ownership.
Analysts expect foreign selling to moderate in 2026 as money moves out of AI stocks globally.
“Strong domestic inflows crowded out foreign outflows in 2025,” said Saion Mukherjee, an analyst at Nomura.
“While a surge in FII inflows is unlikely, a moderation in global AI trade and a drop in relative valuations compared to other Asian and emerging market peers make the case for an increase in foreign interest in Indian markets in 2026.”
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