Foreign Institutional Investors' Selling Frenzy in India: A Closer Look at the Trend

India's Stock Market Suffers Amidst Global AI Trade

India's stock market has taken a hit in recent years, plummeting from being one of the best-performing markets in the world to one of the worst. This decline comes despite India's status as the fastest-growing large economy over the last five years. The primary reason for this downturn is often attributed to sustained Foreign Institutional Investor (FII) selling, which began in 2025 and continues in 2026.

FII selling has contributed to the weakness in the market, with capital outflows weakening the currency. This, in turn, has accelerated FII selling, creating a vicious cycle of outflows depreciating the rupee and the falling currency triggering further FII selling. This trend has become a major concern for investors, with questions surrounding the correlation between FII flows and market trends, the impact of FII selling on market decline, and when FIIs will turn buyers.

Research suggests that there is no correlation between FII activity and long-term market trends. In fact, Benjamin Graham famously said, "In the long run, the market is a slave of earnings." To illustrate this point, let's examine the recent data on FII flows and market trends. Over the last five calendar years from 2021 to 2025, FIIs were buyers in 2021, 2023, and 2024, but big sellers in 2022 and 2025. Despite these negative flows, the Nifty index rose from 14,018 on January 1, 2021, to 26,129 on December 31, 2025, an appreciation of 86.4%.

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As shown in the table, despite significant negative FII flows in 2022 and 2025, the Nifty index still appreciated by 86.4% over the five-year period. However, massive selling by FIIs on a sustained basis can impact the market in the short run. The ongoing AI trade is the primary trigger for FII outflows from India. India, being an AI laggard, couldn't participate in the AI trade, which dominated global stock markets in 2025 and continues to do so in 2026.

The AI trade is a concentrated trade in a few stocks, with Nvidia, Microsoft, Alphabet, Amazon, and Meta leading the charge in the USA. In Taiwan and South Korea, three stocks - TSMC, Samsung, and SK Hynix - are attracting significant portfolio flows. TSMC has 44% weight in the Taiex, while Samsung and SK Hynix combined have 40% weight in Kospi. These stocks have contributed significantly to the rally in their respective markets in 2025, with TSMC contributing 64% to Taiex's 25.73% rally and Samsung and SK Hynix contributing 50% to Kospi's 75% rally.

The boom in AI trade and momentum in these markets are triggering portfolio outflows from India. Relatively high valuations and modest earnings growth in India have aided these outflows. However, market experts believe that AI stocks are in bubble territory now, and a correction in this segment is possible at any time. If India's earnings growth prospects improve, FPIs will turn buyers in India. Given India's best long-term growth story and wide variety of sectors to choose from, it's only a matter of time before FIIs turn buyers in India.

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