India Strategy : The In and Out of FII flows: Sentiment sours again! by Motilal Oswal Financial services Ltd
In this report, we analyze sector-wise FII flows in the Indian equity market during Sep’26 and CY26YTD and assess foreign investors’ broader sectoral positioning over the year.
* The Indian market remained under pressure amid persistent global headwinds, including elevated crude oil prices, rising inflationary pressures and sustained capital flows into global AI-related trades. Heightened geopolitical uncertainty and persistent inflation concerns have pushed developed-market bond yields to multi-year highs, raising concerns over tighter global financial conditions and the onset of a new interest rate hiking cycle. The RBI and several global central banks have already resumed rate hikes or signaled that monetary policy will remain restrictive for longer.
* Against this backdrop of persistent and renewed headwinds, FII flows turned negative in Sep’26 after two consecutive months of inflows, while DIIs retained their positive flow momentum. FIIs recorded net outflows of USD4.1b, while DIIs registered inflows of USD8b.
Financials-led selling drives sharp FII outflows during the month
* FIIs sold USD4.1b worth of Indian equities, reversing two consecutive months of inflows, while DIIs invested USD8b, marking their highest monthly inflows in three months. ? FIIs remained the most bearish on Financial Services (+USD1.4b), O&G (-USD0.7b), Automobiles (-USD0.6b), Telecom (-USD0.4b), Metals (-USD0.3b), and FMCG (-USD 0.3b). In contrast, they were most bullish on Consumer Services (+USD0.24b) and Healthcare (+USD0.22b) during the month.
* In Sep’26, 13 of the 20 sectors saw net FII outflows vs. 14 sectors in CY26YTD.
* Note: Sectoral FPI flow data for a given month exclude transactions from the final trading day, which are reflected in the following month’s data, according to NSDL. Refer to Exhibits 15 onward for monthly sector-wise flows.
CY26YTD: Financials continue to witness the sharpest FII outflows
* In CY26YTD, FIIs have sold a record ~USD68b worth of Indian equities. Financial Services (-USD12.2b), Autos (-USD4.1b), and O&G (-USD3.9b) witnessed the sharpest FII outflows, while Metals (+USD1.8b), Capital Goods, (+USD1.6b), and Services (+USD1.3b) experienced the highest inflows.
* In CY26YTD, Metals (+USD1.8b) emerged as the most preferred sector among FIIs, while Financials (-USD12.2b) remained the least preferred. This marks a clear shift from CY25, when Telecom (+USD 5.5b) was the most preferred sector and Technology (-USD8.6b) remained the least preferred.
* Notably, O&G (-USD3.9b), FMCG (-USD3.5b) and Telecom (-USD3.4b) witnessed FII outflows in nearly every month of CY26YTD.
Continued volatility in FII flows remains a key overhang for Indian markets
* Despite strong macroeconomic fundamentals, a correction in valuations from 2024 peak levels, strengthening corporate earnings, and robust domestic liquidity, FII outflows have continued to weigh on market sentiment. Sustained selling in large-cap-heavy sectors has also contributed to the significant underperformance of large-caps relative to SMIDs over the past two years.
* While we do not expect a sharp and sustained recovery in FII inflows in the near term, strengthening corporate earnings (15% CAGR over FY26-FY28E), macroeconomic resilience despite geopolitical headwinds, and valuations below historical averages for large-caps (-18%) and mid-caps (-8%) have notably improved the risk-reward profile of Indian equities vs. the past two years.
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
