Foreign institutional investor (FII) outflows from Indian equities have begun to moderate following the US-Iran ceasefire, fuelling expectations that overseas investors could gradually return to the market after months of heavy selling, according to a report by Motilal Oswal Financial Services.
While foreign investors continued to remain net sellers in June 2026, the pace of withdrawals slowed considerably, signalling that the worst of the selling pressure may be over.
Foreign selling loses momentum
FIIs remained net sellers for the fourth consecutive month in June, pulling out USD 5.2 billion from Indian equities. However, the trend improved sharply during the latter half of the month. After recording net outflows of USD 4.3 billion in the first fortnight, overseas investors turned net buyers with inflows of USD 1.3 billion in the second half of June.
The report noted that Indian equities have remained volatile over the past 21 months as persistent foreign selling offset record domestic institutional investor (DII) inflows. Since the market peak in September 2024, FIIs have sold more than USD 60 billion worth of Indian equities, including nearly USD 29.2 billion during calendar year 2026 so far. In contrast, DIIs have invested a record USD 162 billion between October 2024 and June 2026, helping cushion the impact of overseas withdrawals.
Geopolitical easing lifts investor confidence
The brokerage attributed the improving sentiment to easing geopolitical tensions following the US-Iran ceasefire, declining crude oil prices, stronger corporate earnings and more attractive market valuations after the recent correction.
It noted that India's valuation premium over other emerging markets has narrowed to historic lows, making the country increasingly attractive for global investors. Average daily FII flows shifted from net selling of around USD 400 million during the West Asia conflict to net buying of nearly USD 100 million after the ceasefire announcement, supporting the rebound in Indian equities.
The report also observed that the current cautious stance of FIIs largely reflects global capital chasing AI-led investment opportunities. As the AI investment cycle broadens and macroeconomic conditions improve, India's investment appeal is expected to strengthen further.
Financials attract buyers as oil & gas sees biggest exits
Sector-wise, oil and gas witnessed the highest foreign outflows in June at USD 1.4 billion, followed by automobiles (USD 1.1 billion), metals (USD 1 billion) and technology (USD 788 million).
On the other hand, financial services emerged as the biggest recipient of FII inflows during the month, attracting USD 357 million, followed by services at USD 306 million and consumer durables at USD 204 million. The report also noted that capital goods recorded its first monthly outflow in six months, while consumer services saw inflows after five consecutive months of selling.
Capital goods and metals remain preferred bets
Despite the recent improvement in June, financial services remained the least favoured sector among FIIs in calendar year 2026, witnessing cumulative outflows of USD 11.8 billion. Technology followed with withdrawals of USD 3.7 billion, while automobiles recorded outflows of USD 3.3 billion.
In contrast, capital goods attracted the highest inflows of USD 2.3 billion during the year, followed by metals at USD 1.4 billion and services at USD 600 million. Significantly, metals have remained the only sector to attract positive FII inflows in both 2025 and 2026 so far, indicating sustained investor confidence in the segment.
Domestic institutions tighten grip on Indian markets
Persistent foreign selling has continued to reshape ownership patterns in Indian equities. FII holdings in the Nifty 500 declined to a record low of 17.1 per cent in March 2026, down 180 basis points year-on-year and 110 basis points sequentially.
Meanwhile, domestic institutional investors strengthened their presence, with DII ownership rising to an all-time high of 20.9 per cent, reflecting the growing influence of domestic savings in supporting Indian markets despite sustained foreign outflows.
Valuations could pave the way for an FII return
Looking ahead, Motilal Oswal believes the recent moderation in FII selling could mark the beginning of a broader shift in foreign investor sentiment.
The brokerage said easing geopolitical risks, softer crude prices, improving corporate earnings and more reasonable valuations leave fewer reasons for overseas investors to remain persistent sellers. While global capital allocation towards AI continues to influence investment flows, India is well placed to attract fresh foreign capital as macroeconomic conditions improve and market leadership broadens. |
