India’s capital market is currently going through a challenging phase. While domestic investors are buying strongly, foreign portfolio investors (FPIs) and foreign institutional investors (FIIs) are withdrawing on a large scale. This situation is not only putting pressure on major indices like the Nifty 50 and Sensex but is also increasing market volatility. Along with global factors, structural issues have combined to push foreign investors away from Indian markets.
Let us understand this situation in detail and see what lessons it holds for investors.
What’s Happening?
In the first 20 days of March 2026 alone, FPIs have withdrawn Rs 88,180 crore. From February 26 to March 20, across 16 trading sessions, FIIs withdrew a total of Rs 1,00,040 crore, an average selling of Rs 1,000 crore per trading hour. So far in 2026, total withdrawals have crossed Rs 1 lakh crore. February saw an inflow of Rs 22,615 crore, but in March, selling has been recorded on every trading day.
In the first 15 days of March 2026, foreign investors sold shares worth Rs 527.04 billion, with the financial sector accounting for 60% of the total. Financial services alone saw withdrawals of more than Rs 31,000 crore. The Nifty 50 fell 8.1% in the first half, while the financial index declined 9.8% and the banking index dropped 11.2%. So far in 2026, both the Nifty and Sensex are down nearly 10%, marking the worst performance since the COVID-19 pandemic period in March 2020.
FIIs’ assets under custody have fallen to a 13-month low of Rs 65.63 lakh crore, and their share in the Indian equity market has declined to 15.3%. In contrast, domestic institutional investors (DIIs) bought Rs 1,16,586 crore during the same period, averaging Rs 1,200 crore per hour. Compared to Rs 2.4 lakh crore of selling in 2025 and Rs 1.29 lakh crore in 2024, the pace of outflows this year has been faster.
Global Tensions and Cyclical Challenges
Rising tensions in the Middle East, particularly the US-Israel-Iran conflict, have pushed crude oil prices above $100 per barrel. India imports 85–90% of its oil requirements, so the surge in energy prices has increased pressure on inflation, the trade balance, and the overall growth outlook. The rupee has touched record low levels, causing foreign investors to face a double impact due to currency depreciation.
Additionally, rising US bond yields and a strong dollar have made dollar-denominated assets more attractive, leading to fund outflows from emerging markets. Geopolitical tensions, potential disruptions in the Strait of Hormuz, and memories of the Russia-Ukraine war could reignite inflation concerns. Profit booking after February’s rally and fears of margin pressure on corporate earnings have further worsened the situation.
AI Cycle and Structural Barriers
Foreign investors are increasingly shifting towards AI and its broader ecosystem, including semiconductors, cloud infrastructure, and high-performance computing. Most Indian companies are services-focused, and listed opportunities in deep tech or hardware remain limited. FIIs have invested $1.75 trillion in just three semiconductor companies (TSMC, Samsung, and SK Hynix), while their total exposure to the entire Indian equity market stands at only $750 billion.
India will need to significantly expand its AI data centre capacity from 5 GW to 15–20 GW by 2030. However, a typical AI data centre costs $6–8 billion, while a semiconductor fabrication unit requires $9–10 billion. A shortage of 3.5 lakh skilled professionals and the limited presence of listed deep-tech companies act as structural constraints. Concerns around AI-driven disruption in the IT sector and heavy selling in financial stocks (which have high foreign ownership) stem from these challenges. This trend is not merely cyclical but part of a broader global AI investment shift.
What Does This Mean for Investors?
In the short term, the situation remains uncertain, but it is also creating opportunities. After heavy selling in the financial sector, valuations have become more reasonable. Strong support from domestic investors, through mutual fund SIPs, insurance, and pension funds, is helping stabilise the market.
If the rupee stabilises and earnings growth becomes more visible, foreign flows could return. However, governance concerns (such as those surrounding HDFC Bank) and elevated oil prices suggest that caution is still warranted. Long-term investors can view this dip as a strategic buying opportunity, but should avoid expecting immediate gains.
What’s Next?
In the near term, the market is likely to remain volatile. Until geopolitical tensions ease, oil prices stabilise, and global uncertainties subside, a meaningful return of FPI flows appears unlikely. At the same time, if India strengthens its AI ecosystem through data centres, skill development, and the emergence of listed deep-tech companies, this phase could turn into India’s ‘Black Swan moment’ in AI, potentially attracting foreign investors over the long run.
For now, the resilience of domestic investors is supporting the market. However, if the Middle East conflict persists or oil prices remain above $100, pressure on inflation and growth could intensify. Investors should stay disciplined, conduct thorough research, and maintain a long-term perspective.
Disclaimer: This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The companies mentioned are cited as examples within the context of market developments. Investors are advised to conduct their own due diligence and consult their financial advisor before making any investment decisions.
Investments in the securities market are subject to market risks. Read all related documents carefully before investing.
