After a challenging year for overseas investment in India, signs are emerging that foreign portfolio investment (FPI) could be poised for a significant rebound in 2026. The bruising 2025 saw record outflows, but market analysts are optimistic that the headwinds are lessening, while fundamental strengths in the Indian economy and corporate sector are becoming increasingly attractive to global investors. This shift is driven by a combination of factors including improving earnings potential, attractive valuations, and a stable macroeconomic outlook.
Why FPIs Exited Indian Equities in 2025
Last year presented a confluence of issues that prompted a substantial withdrawal of funds from Indian equities. According to a recent report by Antique Stock Broking Limited, the total FPI outflow in the calendar year 2025 reached USD 17.5 billion, the highest on record in absolute terms. Several elements contributed to this trend.
Weak Earnings Momentum & Global Risk
Initially, a period of weak earnings growth within India raised concerns among investors. Simultaneously, global economic uncertainties and a rise in risk aversion saw capital flowing towards safer havens. This double whammy created an unfavorable environment for continued investment in emerging markets like India.
The Appeal of AI-Focused Markets
Perhaps the most significant factor driving the exodus was the surging interest in Artificial Intelligence (AI) and the markets leading its development. Global investors began prioritizing countries and companies directly involved in the AI revolution—specifically those in semiconductors, advanced hardware, cloud infrastructure and AI-native platforms. The US, Taiwan, and East Asian nations currently dominate these crucial value chains, diverting capital away from India in pursuit of higher potential returns. This focus on AI investments created a strong relative pull, overshadowing India’s positive attributes.
The Potential for an FPI Comeback in 2026
However, the outlook for 2026 is markedly different. Antique Stock Broking’s “India Equity Strategy 2026” report pinpoints several key reasons for a possible reversal in the FPI trend. Crucially, the conditions that triggered the 2025 outflow are showing signs of easing.
Favorable Technical Indicators
The report indicates that the six-month FPI equity flow is currently at -1 Standard Deviation, suggesting an oversold condition ripe for a recovery. This technical signal, combined with other factors, hints at a potential buying opportunity.
Strong Fundamentals & Reasonable Valuations
India’s underlying economic fundamentals remain robust. Real GDP is projected to stay around 7.5%, a highly attractive growth rate. Inflation is expected to remain under control and the current account deficit is forecast to be below 1% of GDP, contributing to a remarkably supportive macroeconomic environment. Furthermore, Indian equity valuations are now considered reasonable when compared to other emerging and developed markets, increasing their appeal.
Rising Domestic Investment
The report also highlights robust domestic investment as a stabilizing force. Continued Systematic Investment Plan (SIP) flows, increasing preference for equities among domestic investors, and consistent contributions from entities like EPFO and NPS are creating a strong internal demand for Indian stocks. This reduces reliance on volatile foreign portfolio investment.
The Lingering AI Risk & Sectoral Divergence
Despite the positive outlook, a critical risk remains: the continued preference for AI-exposed markets. While India’s overall growth story is compelling, its relatively limited direct participation in the AI production ecosystem could constrain large-scale inflows.
This disparity isn’t expected to impact all sectors equally. Capital-intensive, domestically-focused industries, like banking, infrastructure, and consumer goods are predicted to continue performing well, driven by internal demand. However, technology services, traditional export-oriented businesses and widely-held index stocks might struggle to attract the same level of attention if they cannot demonstrate a clear and credible path towards AI monetization. This difference in investment interest may lead to widening performance divergences between different segments of the Indian market.
Navigating the Indian Equity Market in 2026
While the challenges presented by the AI narrative are real, the improving macro stability, anticipated earnings acceleration, and reasonable equity valuations create a compelling case for a return of foreign portfolio investment to India in 2026. Corporate earnings are projected to grow at a Compound Annual Growth Rate (CAGR) of approximately 16% over the fiscal years 2026-2028, a significant improvement compared to the roughly 7% growth experienced in the previous two years.
Investors should carefully consider sectoral nuances and the ability of companies to adapt to the evolving technological landscape. A discerning approach, focusing on companies with strong domestic fundamentals and long-term growth potential, will be key to successfully navigating the Indian equity market in the coming year. Keeping a close watch on global monetary conditions and overall risk sentiment will also be crucial to capitalize on the anticipated rebound in investment.
