Lacklustre corporate earnings growth and a steeply depreciating currency have eroded foreign portfolio investor (FPI) returns over the last year, driving them out of Indian markets, a trend likely to continue amid elevated crude oil prices due to the West Asia war, according to analysts.
The Nifty 50 USD, which measures India's bellwether stock index in dollar terms, has generated a 13.41% negative return, compared with the barely 4% negative return of the index in rupee terms over the past one year through 22 May, per Bloomberg data.
This has resulted in foreign portfolio investors (FPIs) withdrawing $39.94 billion ( ₹3.65 trillion) from Indian secondary markets over the period (22 May 2025-22 May 2026). While mutual fund-led domestic institutional investors (DIIs) net invested a whopping ₹8.98 trillion over the same period, the outflows by FPIs caused the Nifty to slip almost 4% to 23,719.30 in the past one year through Friday.
Consequent to the heavy selling FPI ownership of NSE-listed firms has hit a 17 year low of 15.8% , per exchange data.
Though in the past, too, FPI dollar returns underperformed the Nifty's returns because of a weaker rupee, they were positive—for instance, on a three- and five-year time frame, Nifty in dollar terms yielded 12% and 19% returns, against Nifty rupee's 30% and 56% returns.
While the rupee fell by 10.15% over the past one year through May, the average annual depreciation between May 2023 and May 2026 was 4.5% and 4.8% over a five-year time frame.
Despite the weaker rupee over five years, the long-term FPI Nifty dollar returns were positive, thanks to buoyant earnings over three and five years relative to the US benchmark stock index, the Dow Jones Industrial Average.
- Rupee's 10% fall turned a modest market dip into foreign-investor pain.
- FPIs pulled nearly $40 billion out of Indian markets over the past year.
- FPI ownership of Indian stocks hit a 17-year low of 15.8%.
- Retail SIP flows are absorbing FPI sales but enabling cheap exits.
- Crude at $103 a barrel deepens India's current account and currency woes.
When earnings faltered, the dollar gap widened
For instance, Nifty earnings per share (EPS) growth was 12.33% at 2023-end and 18.06% at 2024-end, against the Dow EPS growth of a negative 10.37% in 2023 and 11.44% in 2024, per Bloomberg data.
This changed in 2025, when Nifty's EPS grew by 15% compared to Dow Jones' 19%. In the current year to date, the Dow continues to outperform, notching an EPS growth of 13.99% as of 22 May against a negative Nifty EPS growth of 1.6%.
"An unfavourable base effect of calendar 2024, labour code changes, which raised employee costs and compressed margins for companies, rupee depreciation and elevated crude due to tensions in the Middle East impacted Nifty EPS growth in 2025," said Nilesh Shah, managing director of Kotak Mahindra AMC, citing reasons for FPI outflows over the previous and current year to date.
Asked whether FPI outflows would continue, Shah said it depended on the trajectory of crude prices and the global artificial intelligence cycle, which has left India out.
Brent crude has risen 43% through $103.40 a barrel since the US and Israel versus Iran war began at the end of February. This hurts India, which imports about 85% of the 5.6 million barrels it consumes daily.
Meanwhile, the Nifty IT index had tanked 22% over the past one year to 28,912.45 as of 22 May, vastly underperforming the Nifty, which has fallen 3.6% to 23,719.3 over the same period, per exchange data.
How SIPs are funding FPI departures
Other experts sounded more pessimistic about a reversal of FPI outflows, citing abundant domestic investor liquidity and the absence of an AI play in India.
"War has little to do with FPI exits. Sustained FPI outflows can be attributed to the unbelievable exit liquidity because of SIPs (systematic investment plans), something I wrote back in February 2025, that this was going to create a macro disaster," said veteran investor Shankar Sharma.
He also cited FPIs' poor expected returns from India, which has "no play in technology."
Foreign institution holdings in Tata Consultancy Services, India's largest software exporter, fell to 9.66% in the quarter ended March 2026, down from 12.04% a year ago and 12.68% sequentially, reflecting a lower appetite among FPIs for Indian IT services firms.
SIP investment into mutual funds by retail investors, on the other hand, stood at ₹3.49 trillion in FY26, up 21% from the previous fiscal and 264% from five years ago, per Association of Mutual Funds in India (Amfi) data.
It's these inflows that mutual funds are deploying to absorb FPI outflows. While this cushions the market fall, it results in giving exits to foreign investors at relatively high prices from their purchase prices.
Queried about the rupee trajectory, Madan Sabnavis, chief economist of Bank of Baroda, said the currency was in ‘uncharted territory’ and could veer in a 95-97 range to the dollar. The local unit settled up half a per cent at 95.69/$ on Friday.
With capital flows negative, financing the current account deficit has become a challenge, per Sabnavis, which could further raise demand for dollars, pressuring the rupee. CAD reflects a country's trade balance with the rest of the world.
West Asia war effect
Of the $19.6 billion in outflows in FY26, nearly 72% ($14.2 billion) occurred in the March quarter, coinciding with the West Asia war, according to recently released NSE data.
Individuals share (those trading directly and through mutual funds) stood at a near-record high of 18.7% in the March quarter, reflecting their absorption of FPI selling, per exchange data.