by Sanjuktha Athreya.
In 2026, many have expressed concern about the flight of foreign portfolio investors from India. Examples of this alarm are found here, here, here, here, here and here.
Capital flow reversals are an important concern in the literature on international capital markets. However, to understand whether recent outflows represent a meaningful change in foreign investor participation, we need to look at both flows and stocks. The flow is the net investment by foreign investors in a given time period, and the stock is the size of their position in India on a certain date. In this article, we put the two together to ask how large recent flows are relative to the stock of foreign investment. We find that foreign portfolio investment in India has been rather stable.
Concerns about foreign investment
Foreign investment has long been the subject of debate in India. Concerns have included the possibility of foreign investors exiting en masse during periods of stress, their influence on price discovery, and the advantages they might have relative to domestic investors. Over the years, policymakers have ventured to slowly remove many state-induced constraints upon international economic engagement.
Some literature examines the behaviour of foreign institutional investors in Indian equity markets. Patnaik and Shah (2013) find that foreign investors favour larger and more liquid stocks and, after accounting for asset allocation, perform relatively poorly in security selection. Patnaik, Shah and Singh (2013) find little evidence that foreign investors destabilise Indian equity markets during periods of stress. More recent work finds evidence of positive-feedback trading and stock-level herding among foreign investors, though not at the market level during extreme conditions (Mukherjee and Tiwari, 2022).
The flow view
Net FPI flows measure the value of purchases minus sales by foreign portfolio investors over a period, reported by the depositories at various frequencies, including daily. This data is timely, free, effortless to use, and hence dominates the public discussion.
In Figure 1, we show quarterly flows measured in trillion rupees. The blue bars are quarters in which there was net investment into India, and the red bars are those where there was a net exit from India. The biggest exits seen are about Rs.1 trillion to Rs.1.5 trillion rupees within a quarter, and they have all arisen in the period after 2022. This is the factual foundation of the gloom reported above.
The importance of the stock
What can be more interesting is the position of all foreign investors, in the magnitude of their ownership of Indian equities. More than quarter-to-quarter fluctuations of inflows and outflows, this reveals the view of India as seen by foreign investors. This can be viewed in two units: The stock of foreign ownership of Indian listed equities measured in trillion rupees, and the share of Indian listed equity ownership that is in the hands of foreign investors measured in per cent.
In the field of international capital markets, economists have developed rich insights into the behaviour of foreign investors. This knowledge is oriented around both flow and stock measures. Three important concepts here are home bias (French and Poterba, 1991) which is about the slow process through which investors step out from their comfort zone of investing domestically, capital flow reversals which are a sustained decline in the level of foreign claims (Calvo, 1998; Forbes and Warnock, 2012), and net investment positions (Lane and Milesi-Ferretti, 2007) which build external asset and liability positions for a country.
Constructing the stock
We use the ProwessDx Equity Ownership Pattern database together with NSE trading data. For each listed firm, at each quarter-end, we take the number of shares held by foreign institutional investors in a non-promoter capacity, as reported in the quarterly shareholding pattern disclosures. We multiply this by the firm's closing price on the last trading day of the quarter, which gives the market value of foreign holdings in that firm. Summing across firms gives the aggregate stock. We do this in two ways: for all listed companies and for the Nifty members only. Unlike flow data, constructing this series requires some additional work, and the shareholding pattern is only reported once a quarter, which helps explain why this information is not widely seen in the discourse.
The FPI equity stock, 2008-2026
The left pane shows the rupee value of the stock, for all listed firms and for the Nifty 50 separately. Foreign holdings stood at roughly Rs.5 trillion in 2008 and now exceed Rs.75 trillion at the end of the sample. There is no large retreat by foreign investors, taken as a whole, we do not see a capital flow reversal.
Early in this data, the two lines shown in the left pane were close to each other. Foreign investment was largely in the Nifty companies. By about 2022 we see foreign investment has spread to a substantial extent to non-Nifty companies. This indicates declining home bias.
Panel (b) reports the same facts as a share of market capitalisation. The share rose through the 2010s, peaked around 2020-21, and has fallen since. This fall has been steeper for the broader universe of listed firms, from roughly 21 per cent to 16 per cent. For the Nifty 50, it has fallen from roughly 26 per cent to 22 per cent.
There was a period till about 2015 where home bias was declining (i.e. the foreign ownership share was rising). After that, it first stalled, and from about 2020, home bias has increased.
Summarising this in jargon, there has been no capital flow reversal; foreign investment in India is exceptionally stable; however, we are in a period of worsening home bias against India.
Quarterly movements expressed against the stock
The right way to think about the flow of net portfolio investment in a quarter is not in absolute terms (measured in trillion rupees) but as a share of the stock of foreign ownership. What percentage of their holding did they add or remove in a given quarter?
The alarm bells that have gone off in India, about a net outflow of Rs.1 trillion in a quarter, pertain to less than 2 per cent of the outstanding stock. Foreign portfolio investment in India is fairly stable, with only small movements in and out in a given quarter.
Across the entire eighteen years that are shown in the graph above, which includes the global financial crisis, the taper tantrum and the pandemic, the largest single-quarter net exit amounts to 3 per cent of the stock. Foreign portfolio investment in India does not show the maladies of a sudden stop or a capital flow reversal.
Conclusion
In recent months, there has been a certain amount of "the sky is falling down" commentary based on rupee values of foreign portfolio investment, which have often shown values like a trillion rupees exited in one quarter. India has grown substantially over this period, and so has the stock of foreign investment in its equity markets. A Rs.1 trillion quarterly outflow therefore needs to be seen against a much larger underlying stock than it would have represented in the past. Our findings here summarise into:
- Foreign portfolio investors have supplied a lot of capital to India: the market value of their stock of listed equities now stands at about Rs.75 trillion. On this base, a one-quarter exit of Rs.1 trillion is not large.
- There is a decline in home bias in that foreign portfolio investment has broadened considerably beyond the Nifty companies.
- Home bias first reduced till about 2015. After that, the share of foreign ownership stalled, and then it has gone into a decline. We are in a phase of worsening home bias against India. In this sense, there appears to be a retreat in India's financial globalisation.
- Foreign portfolio investment has been rather stable, with a one-quarter exit that seldom exceeds 2 to 3 per cent of their ownership in India. There has been no sudden stop and no capital flow reversal. However, there has been a stall in the growth of FPI relative to the size of the Indian equity market.
Bibliography
Capital flows and capital-market crises: The simple economics of sudden stops, Guillermo A. Calvo, Journal of Applied Economics, Vol. 1, No. 1, November 1998.
Capital flow waves: Surges, stops, flight, and retrenchment, Kristin J. Forbes and Francis E. Warnock, Journal of International Economics, Vol. 88, No. 2, 2012.
Investor diversification and international equity markets, Kenneth R. French and James M. Poterba, American Economic Review (Papers and Proceedings), Vol. 81, No. 2, May 1991.
The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004, Philip R. Lane and Gian Maria Milesi-Ferretti, Journal of International Economics, Vol. 73, No. 2, November 2007.
The investment technology of foreign and domestic institutional investors in an emerging market, Ila Patnaik and Ajay Shah, Journal of International Money and Finance, Vol. 39, December 2013.
Foreign Investors under Stress: Evidence from India, Ila Patnaik, Ajay Shah and Nirvikar Singh, International Finance, Vol. 16, No. 2, September 2013.
Trading Behaviour of Foreign Institutional Investors: Evidence from Indian Stock Markets, Paramita Mukherjee and Sweta Tiwari, Asia-Pacific Financial Markets, Vol. 29, 2022.
FPIs pull out Rs 88,180 crore in March, Press Trust of India / NDTV Profit, 22 March 2026.
Explained: Why global brokerages are hitting the panic button on India. FII exodus and oil shock raising alarms?, Economic Times, 31 March 2026.
FPI exodus in four months of 2026 surpasses all of last year, Economic Times, 30 April 2026.
FPIs pull out Rs 60,847 crore in April; 2026 outflows hit Rs 1.92 lakh crore, Business Standard, 1 May 2026.
FII Sell-off: Why Foreign Investors Sold Rs 2.06 Lakh Crore in 2026, Outlook Money, 10 May 2026.
FPIs continue to exit India: June equity outflows hit Rs 49,340 crore, Times of India, 2 July 2026.
Sanjuktha Athreya is a researcher at XKDR Forum. The author would like to thank Anjali Sharma, Ajay Shah, Susan Thomas, and Shubho Roy for their valuable feedback and discussions.
What we must also look at cumulative flows have been negative since 2021 - which has been indirectly pointed out. This may be a bigger cause of concern instead of just the high negative number from quarter to quarter.
ReplyDeleteAll said and done, as Dr Ajay Shah points out in a recent podcast we must be empathetic towards a foreign investor given the landscape of bureaucratic red tape that we present.