Foreign Portfolio Investors' Return to Indian Markets Hinges on Regulatory Clarity

Indian Stock Market Bleeds as Foreign Investors Continue Selling Spree

Amid relentless selling by foreign portfolio investors (FPIs) driven by rising tensions in the Middle East, elevated valuations, and recent tax changes, investors have been hitting the sell button aggressively in the Indian stock market, causing local equities to bleed heavily. This comes as FPIs have continued to sell Indian stocks, with a cumulative outflow of ₹1.37 lakh crore in the first seven trading sessions of April.

Zerodha co-founder Nithin Kamath has flagged multiple structural concerns that could be dampening foreign investor interest in India. Citing feedback from an industry participant, Kamath pointed to geopolitical risks, rich valuations, lack of meaningful AI opportunities, and tax concerns as contributing factors. India is seen as geopolitically exposed, particularly to potential oil shocks, while also lacking meaningful AI plays, with rich valuations and currency concerns weighing on sentiment.

Investors who were sitting on gains have taken money off the table and are now looking at markets such as Japan, Taiwan, Korea, and Europe instead. Referring to the same feedback, Kamath said the current LTCG/STCG structure, along with the increase in securities transaction tax (STT), has made India less attractive compared to other markets that are witnessing inflows. He added that addressing these issues could be relatively low-hanging fruit if India wants to attract FPIs back.

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FPI selling in 2026 has surpassed total 2025 outflows. After withdrawing more than ₹1 lakh crore in March, overseas investors have extended their selling spree into early April, as tensions in West Asia continue to simmer, keeping risk aversion intact. Higher yields have improved the relative attractiveness of dollar-denominated assets, prompting capital to move away from emerging markets such as India.

The following table highlights the FPI outflows in India:

In FY26 so far, FPIs have withdrawn ₹1.77 lakh crore, crossing the total outflows of ₹1.66 lakh crore in 2025. In March alone, they withdrew ₹1.17 lakh crore, marking the highest monthly FPI selling on record, implying an average daily outflow of around ₹6,198 crore.

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The Indian stock market began 2026 amid a fresh wave of optimism after underperforming most of its Asian peers in 2025. However, unexpected tensions in West Asia have created energy disruptions, clouding the near-term outlook, with analysts not ruling out a resumption of earnings cuts if the situation does not improve. In terms of earnings, domestic brokerage firm Motilal Oswal said the current March quarter earnings will reflect the impact of the Strait of Hormuz crisis, expecting Nifty 50 earnings to grow 6% year-on-year in Q4 FY26.