Year-ender 2025: D-St set to see record FII selloff; DII inflows cushion

Dalal Street (D-St) is poised to close calendar year 2025 (CY25) amid the worst ever global fund selloff in Indian equities, even as steady domestic institutional investor (DII) inflows cushioned the impact, preventing deeper losses.

 

CY26, however, could bring back more foreign funds into the Indian equity markets in the backdrop of lower domestic interest rates, stable inflation, and improving earnings visibility, analysts believe, provided the rupee-dollar equation remains supportive.

 

So far this year, foreign portfolio investors (FPIs) have sold equities worth ₹1.51 trillion, the highest ever in a calendar year. In contrast, domestic mutual funds (MFs) have infused the highest ever ₹4.84 trillion this year amid strong inflows via systematic investment plans (SIPs).

 

According to Anirudh Garg, partner and fund manager at INVasset PMS, selling by foreign institutional investors (FIIs) seen this year was largely a function of global capital reallocation rather than a reassessment of India's structural story.

 

"Elevated global interest rates, particularly in the US, improved risk-free returns and reduced the relative attractiveness of emerging market (EM) equities. Geopolitical uncertainty and trade-policy noise further reinforced a defensive stance," he added.

 

The weakness in the currency, analysts pointed out, further weighed on FII flows in 2025. The Indian rupee has emerged as the worst performing currency in Asia, depreciating 4.73 per cent versus the US dollar this year.

 

"Currency volatility added another layer of caution as a weaker rupee diluted dollar-denominated equity returns and encouraged profit-taking," Garg explained.

 

In this backdrop, Naren Agarwal, chief executive officer (CEO) at Wealth1, believes FIIs' selling was not a rejection of India's growth story, but a tactical reduction in exposure when global yields, currency dynamics, and relative valuations turned less favourable.

 

DIIs hold fort

 

Nonetheless, despite the global uncertainty and a selloff in risk assets, the Nifty 50 has stayed range-bound over the past few months, supported by robust domestic inflows. India VIX, a gauge tracking expectations for future swings, hit an all-time low of 9.49 on Tuesday.

 

Strong DII flows, Wealth1's Agarwal said, are a sign of a steady rise in household financialisation, which has created a consistent pool of capital, largely insensitive to short-term market swings. "This is why corrections were increasingly met with domestic buying rather than panic selling," he said.

 

As for retail investors, analysts noted that their confidence in India's long-term growth story remains intact, tempered by a more cautious and informed approach to risk. Retail investors are increasingly deploying capital through systematic routes rather than chasing momentum, reducing panic selling, Agarwal added.

 

FII flows outlook in 2026

 

With the benchmarks on the cusp of recording their worst performance compared to global peers in decades — Nifty 50 index up 10.7 per cent so far this year, and the 30-stock Sensex 9.5 per cent — analysts see Indian stock market emerging as a relatively attractive destination for FIIs in 2026.

 

According to Agarwal, a softer interest-rate environment at home, anchored inflation expectations, and better earnings visibility could make Indian equities more competitive for FIIs, within EM allocations, especially if US bond yields ease and the dollar weakens.

 

Garg, on the other hand, noted that if global rates ease and currency volatility moderates, India could stand out as one of the few large economies offering durable growth, policy continuity, and relatively stable earnings visibility.

 

FII inflows, he said, are likely to be selective, with close attention to valuations and the rupee's trajectory.

 

"Domestically, SIP inflows are likely to remain resilient as long as employment trends, income growth, and financialisation continue. DIIs are, therefore, likely to remain a steady source of support in 2026, even if foreign flows remain cyclical," he added.