FIIs have sold nearly ₹3 lakh crore of Indian equities this calendar year, using every quarter to cut exposure to bluechip stocks. Almost every second Nifty stock has seen FII ownership decline in each of the first three quarters of 2026 amid fears that the broad-based foreign selloff is far from over.
An analysis of shareholding patterns of all Nifty stocks found that out of the batch of 50 stocks, 21 of them saw FII holding going down in all the 3 quarters of March, June and September. The sell-off has also led to a sharp drop in stock prices. Eighteen of the 21 stocks declined in 2026, with ITC, Maruti Suzuki, HDFC Life, HDFC Bank and Tata Motors Passenger Vehicles among the worst performers.
The largest decline in FII ownership was recorded in Max Healthcare, where the stake fell by 10 percentage points over the period. HDFC Bank saw a decline of 8.3 percentage points, followed by HDFC Life at 5.5 percentage points, InterGlobe Aviation at 5.1 percentage points and Kotak Mahindra Bank at 4.7 percentage points.
The trend cuts across sectors. The list includes banks, insurers, automobiles, consumer companies, telecom, IT, aviation, pharmaceuticals, cement and diversified conglomerates.
In the September quarter alone, FIIs reduced their holdings in 70% of Nifty 50 companies on a year-on-year basis. FII ownership in the index declined by 230 basis points from a year earlier and 40 basis points sequentially to 22.4%.
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“The sharp increase in Taiwan and Korea’s emerging-market weights has been supported by a relatively concentrated set of semiconductor and AI-linked companies,” Quest Investment Managers said. “India offers a more diversified sector mix, with opportunities across financials, consumption, manufacturing, healthcare and services.”
The shift in ownership has been even more pronounced across the broader market. Within the Nifty 500, FII ownership fell to a new low of 16.8% in September, while DII ownership rose to a record 21.3%.
DIIs invested $17.7 billion in Indian equities during the second quarter of FY27, compared with $700 million invested by FIIs, according to Motilal. Monthly SIP inflows of about $3.4 billion have further strengthened domestic institutional ownership.
The data suggests that domestic liquidity is absorbing much of the foreign selling pressure but it has not prevented a broad correction in the stocks that FIIs have been steadily reducing.
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Earnings are holding up, but flows are not
The disconnect between corporate earnings and foreign flows is becoming more visible. Jefferies said the September quarter earnings season has been healthy, with 56% of the 105 companies under its coverage reporting results above expectations. FY27 earnings estimates were upgraded for 50% of the companies, while the brokerage raised its MSCI India earnings-growth forecast by one percentage point to about 15%.
Banks, two-wheelers, power utilities and consumer technology companies were among the stronger areas. However, autos, cement, select consumer companies and Larsen & Toubro faced margin pressure.
Kotak Institutional Equities said Q2 net profits for Nifty 50 companies reported so far had grown 19% year-on-year and were 1.7% above its estimates. The brokerage expects Nifty earnings to grow 18% in FY27 and 13% in FY28.
Yet foreign investors continue to cut positions in some of the country’s largest and most liquid companies, leaving investors wondering whether FIIs are rejecting India, or are they reallocating capital within emerging markets while waiting for a better entry point.
Quest Investment Managers also pointed to India’s reduced representation in the emerging market universe. The firm said this could create room for renewed allocations if domestic demand remains resilient, earnings delivery improves and global market leadership broadens beyond Taiwan and South Korea’s semiconductor and artificial intelligence stocks.
Largecaps are cheaper but need foreign buying
The correction has made largecaps more attractive relative to their recent valuation history, even as FII ownership has fallen.
Harsh Gupta Madhusudan, chief India strategist at Ionic Asset, said the Nifty 50’s earnings-yield gap against the 10-year government bond yield was at the 18th percentile of his monthly series since 2011. The corresponding readings for the Nifty Midcap 150 and Nifty Smallcap 250 were 56% and 100%, respectively.
On an absolute price-to-earnings basis, the Nifty 50 was in the bottom 1% of its five-year range, he said.
“Financials are cheapest,” Madhusudan said, pointing to the Bank Nifty trading at 12.7 times earnings, in the fifth percentile of its historical range. However, he added that the sector’s heavy domestic ownership “may need foreign buying for a bid.”
Banks and financial companies have traditionally been among the largest recipients of foreign capital, but they are also among the sectors where FII ownership has declined sharply.
Kotak said macro headwinds have punctured the earlier euphoria in the small- and midcap segment and pushed investors to look more favourably at largecaps, where it sees reasonable value in several stocks. It identified three potential triggers for a market recovery: an end to the Iran-US war and lower crude prices, a reassuring Q2 earnings season, and a shift in investor focus from price and flows towards value and valuations.
The FII retreat is also forcing investors to look beyond the traditional largecap-versus-midcap debate. “The key divide today is not necessarily between large caps and mid or small caps. Nor is it a straightforward choice between growth and value,” said Shreyash Devalkar of Axis Mutual Fund.
“The choice is now between companies that can deliver strong and sustainable earnings growth and those where growth is falling short of investor expectations,” he said.
Devalkar said the relevant earnings-growth hurdle in the current environment was broadly 13% to 15% or higher. Companies that sustain growth above that range can continue to attract capital and command premium valuations, while businesses growing below 10% to 12% may struggle even after their valuations have fallen.
Madhusudan said he remained constructive on India’s earnings cycle and maintained a 60:40 allocation between largecaps and mid- and smallcaps, compared with the market’s 65:35 split. He said investors with cash and a long-term horizon could consider staggering their entry over the next few weeks.
At the same time, he flagged Brent crude, the rupee-dollar rate, US long-term yields, the dollar index, bank credit, margin-trading exposure and FII flows as key variables to monitor.
For now, the data shows a foreign investor retreat that is broad and persistent in the Nifty’s bluechip core. But with earnings holding up and valuations becoming more reasonable, the selloff may eventually create the conditions for a new allocation cycle, provided India’s profit delivery remains strong enough to overcome global risk aversion.
