One of the key highlights of the Indian stock market in 2025 was the stark contrast in the stance of FIIs (foreign institutional investors) and DIIs (domestic institutional investors) on Indian equities. While DII inflows into equities were at a record high, FII sell-offs of Indian equities also touched their highest level last year.

As brokerage firm Motilal Oswal Financial Services highlighted, DII equity inflows were the highest ever at $90 billion, while FIIs witnessed the highest ever equity outflows of nearly $19 billion in 2025.

“DII flows into equities were the highest ever at $90.1 billion in calendar year 2025 (CY25) versus inflows of $62.9 billion in CY24. With just one year of outflows since CY15, DIIs have invested $255.8 billion cumulatively over the last 10 years (CY16-CY25),” said Motilal Oswal Financial Services.

“Conversely, FIIs witnessed the highest ever equity outflows of $18.8 billion in CY25 versus outflows of $0.8 billion in CY24. During the last 10 years, FIIs have invested $32.3 billion cumulatively in the Indian market, with four years of outflows,” the brokerage firm said.

Why are FIIs selling Indian stocks?

In the cash segment, FIIs have been selling Indian equities since July 2025; over the last six months (from July to December), they have cumulatively sold off Indian stocks worth nearly ₹1.85 cross.

The main drivers of this massive FII selloff are weak earnings, premium valuations, US tariffs, and the rupee’s weakness against the dollar.

Experts highlight that the earnings growth of Indian corporates started slowing down since mid-2024, which persisted through 2025. However, the September quarter earnings of Indian corporates were stable, which has fuelled hopes that there will be a healthy earnings growth from Q3FY26 onwards.

Valuations of the Indian stock market have eased but still remain above their long-period averages (LPAs). According to brokerage firm Motilal Oswal Financial Services, the Nifty now trades at a 12-month forward P/E of 21.2 times, 2% premium over its LPA of 20.8 times. The P/B ratio at 3.2 times is an 11% premium to its historical average of 2.9 times.

The market capitalisation-to-GDP ratio now stands at 133% of FY26E GDP, which is well above its long-term average of 87%, said the brokerage firm.

Moreover, the brokerage firm highlighted that about 50% of the Nifty constituents trade at a premium to their historical averages, while two-thirds of the sectors trade at a premium to their historical averages.

On the other hand, uncertainty persists over the India-US trade deal front. Several rounds of talks have not resulted in a final deal between the two countries, keeping foreign investors wary of the prospects of the Indian stock market.

The rupee’s sharp depreciation against the US dollar also contributed to the flight of foreign investors from the Indian financial markets. As Reuters reported, the Indian rupee declined 4.72% against the dollar in 2025, marking its worst performance since 2022, when it crashed nearly 10%.

Can the FII-DII dichotomy persist in 2026?

While DIIs are expected to continue buying Indian stocks, FIIs, too, may come back to Indian markets with earnings recovery and after India’s trade deal with the US.

“DII inflows will certainly continue; FIIs may continue selling in early 2026 since Indian valuations are, even now, relatively higher. But FIIs are likely to turn buyers sometime this year on indications of earnings recovery. The rupee is also likely to slightly strengthen in the first half of 2026. This also can trigger FII buying,” said VK Vijayakumar, Chief Investment Strategist at Geojit Investments.

Shrikant Chouhan, the head of equity research at Kotak Securities, said a lot will depend on how the Indian rupee performs in 2026.

“The tug of war between FIIs and DIIs may continue in 2026. However, we need to see how the Indian rupee shapes up from current levels because that is something which can decide the next course of action for the market,” said Chouhan.

Chouhan said that in the worst scenario, the rupee may fall to the levels of 92, but in the best scenario, the currency can again appreciate to the levels of 87, which can trigger FII buying.

Apart from the rupee’s appreciation, a correction in the US markets will also drive FIIs to the Indian markets because the US market is also attracting a lot of flows across the world, especially from the emerging markets, said Chouhan.

At this juncture, hopes are high that FIIs will come back to the Indian markets in 2026 with earnings improving, the rupee stabilising, and a trade deal in place. In that case, the domestic market may deliver healthy double-digit returns in 2026.

According to Ajit Mishra, SVP of Research at Religare Broking, the FII-DII dynamic reflects a deeper structural shift toward domestic liquidity as global capital became more selective.

Looking into 2026, Mishra expects this tug-of-war to persist, but with evolving nuance.

“Softening global rates, policy support and improving corporate earnings could temper foreign selling and attract selective FII re-entry. At the same time, sustained domestic participation will continue to anchor markets,” said Mishra.

Mishra underscored that the key for investors will be balancing conviction with vigilance, focusing on quality earnings and valuations rather than flows alone.

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