Foreign investors fled Indian equities in 2025 at a scale never seen before, pulling out a record Rs 1.6 lakh crore (USD 18 billion) as volatile currency movements, global trade tensions, especially potential US tariffs, and stretched valuations eroded risk appetite, though flows are expected to turn sustainably positive in 2026.

Also, rising US bond yields, a stronger dollar and concerns over geopolitical uncertainties tilted global capital towards developed markets, away from emerging markets such as India.

Despite the weak showing this year, market participants expect the trend to reverse in 2026.

"We expect FPIs to return sustainably in India as nominal growth and earnings pick up in CY26. Closure of the trade deal with the US should narrow tariff differentials, while Fed rate cuts will keep the dollar soft, favouring emerging-market assets," said Garima Kapoor, deputy head of research and economist at Elara Securities India.

Apart from global tailwinds, domestic factors are also expected to play a role in reviving flows. Indian earnings growth relative to peers, policy continuity and reforms, particularly around the Union Budget, could act as key triggers, said Vikas Gupta, CEO and chief investment strategist at OmniScience Capital.

At the same time, uncertainty on the global macro front will continue to shape FPI behaviour.

"The trajectory of global interest rates, especially the timing and pace of rate cuts, along with developments on tariffs, will be key drivers," said Himanshu Srivastava, principal manager-research at Morningstar Investment Research India, adding that a moderation in US bond yields and a softer dollar could further support a revival in equity inflows.

As of now, foreign portfolio investors (FPIs) have taken out Rs 1.58 lakh crore from the Indian equity markets, while invested over Rs 59,000 crore in the debt market (till December 26) as per data available with the depositories.

This makes 2025 the worst year for equity flows, surpassing the previous record outflow of Rs 1.21 lakh crore in 2022 and coming after a marginal net inflow of just Rs 427 crore in 2024. In contrast, 2023 had seen a robust Rs 1.71 lakh crore equity investment.

Explaining the drivers, analysts point to a mix of global and local pressures.

"Persistently high US interest rates and elevated bond yields improved risk-free returns in developed markets, prompting capital rotation and strengthening the dollar, tightening financial conditions for emerging markets," Srivastava said.

Phases of rupee depreciation further eroded dollar-based returns and raised hedging costs, dampening India's risk-adjusted appeal.These pressures were compounded by geopolitical uncertainty as concerns over energy prices, supply-chain disruptions and trade-related tensions periodically weighed on sentiment, he added.