What is the story about?
Foreign portfolio investment flows into India remained volatile through FY26, with overseas investors gradually trimming equity exposure while stepping up allocations to debt, the Economic Survey 2025–26 noted. The shifting pattern reflects global risk aversion rather than concerns around India’s domestic macro fundamentals.
Equity sell-off, debt rotation
After starting the year as net buyers of Indian equities in Q1 FY26, FPIs reversed course in Q2 and Q3, turning net sellers in the equity market even as they increased purchases of Indian debt instruments. Between April and December 2025, foreign portfolio flows recorded a modest net outflow of $3.9 billion, compared with net inflows of $10.6 billion during the same period a year earlier.
What drove the shift
According to the Survey, the pullback from equities was driven by a combination of factors, including the relative underperformance of Indian markets compared to global peers, heightened trade and policy uncertainties, depreciation in the rupee and a broad-based global risk-off environment amid elevated US bond yields. Export-oriented sectors such as IT and healthcare bore the brunt of this sentiment shift.
Bond yields revive debt appeal
Debt inflows, however, gained momentum as yield dynamics turned favourable. The spread between Indian and US 10-year government bond yields widened to nearly 250 basis points by end-2025, from about 165 basis points in May. Rising domestic yields alongside a softer US dollar helped improve the attractiveness of Indian debt for foreign investors.
Outlook remains mixed
Despite equity outflows, the asset base under custody of FPIs rose 10.4% year-on-year to ₹81.4 lakh crore as of December 31, 2025, supported by valuation gains and steady debt accumulation. However, FPI ownership in NSE-listed equities declined to 16.9% in Q2 FY26.
Also Read : Economic Survey 2026 Live Updates: FM Nirmala Sitharaman tables annual report, pegs growth at 6.8-7.2%
The Survey said the outlook for debt inflows remains positive, aided by SEBI’s easing of investment norms and ongoing India–US trade discussions, even as equity sentiment remains cautious amid global uncertainty.
Equity sell-off, debt rotation
After starting the year as net buyers of Indian equities in Q1 FY26, FPIs reversed course in Q2 and Q3, turning net sellers in the equity market even as they increased purchases of Indian debt instruments. Between April and December 2025, foreign portfolio flows recorded a modest net outflow of $3.9 billion, compared with net inflows of $10.6 billion during the same period a year earlier.
What drove the shift
According to the Survey, the pullback from equities was driven by a combination of factors, including the relative underperformance of Indian markets compared to global peers, heightened trade and policy uncertainties, depreciation in the rupee and a broad-based global risk-off environment amid elevated US bond yields. Export-oriented sectors such as IT and healthcare bore the brunt of this sentiment shift.
Bond yields revive debt appeal
Debt inflows, however, gained momentum as yield dynamics turned favourable. The spread between Indian and US 10-year government bond yields widened to nearly 250 basis points by end-2025, from about 165 basis points in May. Rising domestic yields alongside a softer US dollar helped improve the attractiveness of Indian debt for foreign investors.
Outlook remains mixed
Despite equity outflows, the asset base under custody of FPIs rose 10.4% year-on-year to ₹81.4 lakh crore as of December 31, 2025, supported by valuation gains and steady debt accumulation. However, FPI ownership in NSE-listed equities declined to 16.9% in Q2 FY26.
Also Read : Economic Survey 2026 Live Updates: FM Nirmala Sitharaman tables annual report, pegs growth at 6.8-7.2%
The Survey said the outlook for debt inflows remains positive, aided by SEBI’s easing of investment norms and ongoing India–US trade discussions, even as equity sentiment remains cautious amid global uncertainty.
