The September Selling Spree
The first week of September marked a decisive change in FPI behaviour. After injecting nearly ₹50,000 crore into Indian equities over July and August, foreign investors withdrew approximately ₹7,443 crore in the first four trading days of September alone.
This abrupt selling brought the total FPI outflow from equities for 2026 to over ₹2.32 lakh crore, a figure that already surpasses the total withdrawal for the entire year of 2025. The reversal follows a pattern seen earlier in the year, where FPIs were net sellers for four straight months from March to June before the brief two-month buying period.
The Global Pull of US Bond Yields
A primary driver behind this outflow is happening thousands of miles away in the United States. Yields on US Treasury bonds, considered one of the safest investments globally, have been rising to multi-year highs. When investors can get a higher, safer return from US government bonds, the appeal of holding comparatively riskier assets in emerging markets like India diminishes. This prompts global funds to rebalance their portfolios, shifting capital out of markets like India and into dollar-denominated assets. A strengthening US dollar further compounds this, as it can erode the returns for foreign investors when they convert their rupee earnings back into dollars.
Crude Oil and Inflation Concerns
Another significant global headwind is the rising price of crude oil. As a major importer of oil, India's economy is highly sensitive to fluctuations in energy prices. A sustained rise in crude costs can widen the country's current account deficit and fuel domestic inflation. This prospect makes foreign investors cautious about India's macroeconomic stability, prompting some to reduce their exposure to the Indian market until the outlook on inflation and interest rates becomes clearer.
Domestic Market Valuations
While global factors are the main catalyst, domestic conditions also play a role. After a strong performance in recent months, some analysts believe Indian equity markets, particularly in the mid- and small-cap segments, are trading at premium valuations. These relatively high valuations can lead profit-booking among foreign investors, who may see the current levels as an opportune time to sell and lock in gains, especially when global uncertainties are on the rise. Despite the selling in publicly traded stocks, analysts note that foreign investor interest in India's primary market, through Initial Public Offerings (IPOs), has remained relatively resilient, suggesting a more nuanced view on the country's long-term prospects.
