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For foreign investors backing Indian equities, the financial year 2026 was one they would rather forget. It was a period dotted with global disruptions, starting with US-led tariff uncertainties and ending amid the US-Israel-Iran war. Each external shock raised risks to India Inc.’s headline earnings and triggered a sharp exodus of overseas capital throughout FY26, making market flows more volatile and returns less predictable.

Foreign portfolio investors (FPI) turned the most bearish on India in 34 years, with net outflows surging 42% year-on-year to nearly ₹1.8 trillion in FY26—the highest since 1992, when data first became available, according to Mint’s analysis of National Securities Depository Ltd data. The rout intensified in March 2026 alone, which saw a sharp ₹1.18 trillion sell-off, as the West Asia war unsettled India’s macroeconomic outlook and raised the risk of earnings downgrades for FY27.

After the December-quarter earnings, the Street was pencilling in around 16% earnings growth for the Nifty 50. But the recent surge in crude prices amid the war and its potential spillover into slower economic growth have forced a reset, with estimates now being sharply cut. Goldman Sachs has lowered its forecast to 8%.

“Most foreign investors track headline earnings growth closely, and their allocation to India tends to follow the trajectory of earnings,” Dikshit Mittal, senior equity fund manager at LIC Mutual Fund AMC said.

Strong earnings growth in the post-pandemic phase, particularly till FY24, had drawn FPIs into India as double-digit earnings growth and a relatively stable rupee supported attractive dollar returns, Mittal said. But with earnings momentum slowing over the past 18 months and the rupee weakening by nearly 10.5% over the past year, foreign investors have turned cautious, pulling back capital at the first sign of risk.

Four of the five worst years for FPI flows have occurred since 2021, marking a clear break from the earlier cycle when outflows were episodic and largely confined to global crises such as FY09. Even then, the magnitude was far smaller. FY26 outflows are nearly four times FY09 levels despite India being a much larger and more liquid market today, the analysis showed.

The contrast with the previous decade is stark. Between FY10 and FY15, India saw consistent, large inflows driven by abundant global liquidity, while intermittent outflows were shallow and short-lived. That steady cycle has now broken, giving way to sharp swings between extremes.

For instance, markets saw record FPI inflows in FY21 and FY24, punctuated by deep outflows in the following years, suggesting capital is flowing in bursts rather than a predictable cycle.

Experts attribute much of this shift to changes in global liquidity conditions. Higher interest rates in developed markets have pushed risk-free returns in dollar terms to around 4–5%, making capital more selective and quicker to move across geographies. At the same time, a disproportionate share of global flows is being channelled into artificial intelligence-led opportunities, limiting India’s ability to attract incremental allocations despite a stable macro backdrop.

According to JM Financial Services Ltd, FPIs were earlier drawn to India by strong earnings momentum and the China+1 supply chain narrative, but higher global yields, slower earnings growth and previously elevated valuations have since reduced the market’s relative appeal.

However, after the latest sell-off, India's valuations have eased to around 19 times 12-month trailing earnings, closer to historical averages and global peers. But that alone may not be sufficient to trigger sustained inflows, warned experts. A more compelling entry point for FPIs would be in the 17–18 times price-to-earnings range, alongside a recovery in earnings growth and greater macro stability, according to JM Financial.

Even so, the current FPI sell-off appears largely event-driven, noted experts. “A lot of the fear is event-driven and cyclical,” said Harsh Gupta Madhusudan, fund manager of Ionic Asset’s PIPE Fund, adding that India’s macroeconomic fundamentals remain intact and flows could reverse once geopolitical tensions ease. “The first three weeks of February 2026 saw FPI inflows, so reasonable crude prices and a ceasefire should bring foreign investors back to India,” he added.

But even if flows reverse, their behaviour is unlikely to revert, Anil Rego, founder and fund manager at Right Horizons PMS. “Flows are increasingly driven by oil, rates, currency, and global risk appetite,” said Rego, highlighting that foreign capital now reacts faster and reallocates more frequently than in the past.

So, while the latest trigger is cyclical, the speed and intensity of the response point to a more structural shift in how FPIs engage with India. Experts note that a de-escalation in West Asia and some cooling in crude can offer relief, and part of the recent selling may reverse as risk sentiment improves, but flows are unlikely to return to their earlier steady pattern.

According to Rego the takeaway for domestic investors is clear: FPI flows are now more tactical and volatile rather than a reliable anchor for markets. "Over the long term, returns will depend more on earnings growth than liquidity, making it important to stay invested, focus on quality and earnings visibility, and use corrections to build positions," he said.

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