Foreign Investors Withdraw ₹3.04 Lakh Crore from Indian Equities in 2026
Despite India's strong economic growth, foreign portfolio investors continue to withdraw significant funds from Indian equities due to rising oil prices and narrowing yield gaps.
Foreign investors have pulled out ₹3.04 lakh crore from Indian equities in 2026.
The gap between Indian and US interest rates has narrowed significantly, affecting investment attractiveness.
High crude oil prices are exacerbating the situation, increasing India's import bill and current account deficit.
In a concerning trend for Indian markets, foreign portfolio investors (FPIs) have withdrawn ₹3.04 lakh crore from Indian equities in 2026, surpassing the ₹1.66 lakh crore withdrawn throughout 2025. This ongoing sell-off, which has continued into October with net outflows of ₹44,166 crore, raises questions about the attractiveness of Indian assets amidst a backdrop of rising oil prices and a narrowing yield gap compared to the US.
Historically, India has offered a higher risk-free return than many developed markets, making it an appealing destination for foreign capital. However, the recent narrowing of the yield spread between Indian government bonds and US Treasuries has diminished this advantage. As of October 9, the gap stood at 205 basis points, significantly lower than the historical peak of 709 basis points in November 2011. This shift reflects a broader change in global capital allocation dynamics, compounded by the immediate pressures of elevated crude oil prices.
The current environment presents a complex calculation for foreign investors. While Indian equities are trading at a price-to-earnings ratio of approximately 17, translating to an implied earnings yield of about 5.8%, the returns must be weighed against the costs of currency hedging and the risk of a depreciating rupee. With US risk-free returns now at 5.24%, the relative attractiveness of Indian equities diminishes, especially when factoring in potential rupee depreciation of 3-4% annually.
The situation is further complicated by the impact of high crude oil prices, which are nearing $100 a barrel. Such prices increase India's import bill and widen the current account deficit, putting additional pressure on the rupee. The Reserve Bank of India (RBI) has intervened to support the currency by meeting daily dollar requirements for public-sector oil marketing companies, but this does not address the broader issues affecting capital flows or the overall economic balance.
Looking ahead, unless there is a significant shift in the economic landscape—such as a stabilization of oil prices or a reversal in the narrowing yield gap—sustained foreign portfolio flows into Indian markets are unlikely. Investors will continue to weigh the risks against potential returns, and the current economic conditions suggest that the challenges facing India’s equity markets may persist for the foreseeable future.
