Two years ago, India, along with the US, was the best-performing stock market in the world. India held this record over a twenty-year period.
Now, India is one of the worst-performing stock markets in the world, despite being the fastest-growing large economy over the last five years.
Sustained selling is often touted as the principal reason for India’s underperformance.
The sustained FII selling, which began in 2025 and continues in 2026, has contributed to the weakness in the market.
More importantly, the sustained FII selling and capital outflows have weakened the currency, which, in turn, has further accelerated the FII selling.
Of late, this has become a vicious cycle: outflows depreciating the rupee and the falling currency triggering further FPI selling.
The pertinent questions from the investor perspective are: Is there a correlation between FII flows and the market trend? Has the FII selling contributed to the market decline? Why are the FIIs in a sustained selling mode in India? When will they turn buyers?
No correlation between FII activity and market trend in the long run
It is a fact that sustained FII selling impacts market sentiments and contributes to short-term downtrends in the market. However, there is no correlation between FII activity and the long-term market trend.
As Benjamin Graham famously said, “In the long run, the market is a slave of earnings.”
Let us look at the recent data relating to FII flows and the market trend. In the last five calendar years from 2021 to 2025, FIIs were buyers in 2021,2023 and 2024; they were big sellers in 2022 and 2025.
During this five-year period from 2021 to 2025, the total FII flows were negative ₹90,439 crore (Source: NSDL).
Despite these big negative flows, Nifty went up from 14,018 on 1 January 2021 to 26,129 on 31 December 2025, an appreciation of 86.4%.
Clearly, FII outflows didn’t impact the market.
However, massive selling by FIIs, on a sustained basis, does impact the market in the short run.
If such capital outflows are triggered by some global trends, they will have a significant impact on the market.
The ongoing AI trade is the principal trigger for the FII outflows from India.
India, being an AI laggard, couldn’t participate in the AI trade, which dominated global stock markets in 2025.
This trend is continuing in 2026, too. The US continues to attract the largest portfolio inflows. Other emerging markets like South Korea and Taiwan are attracting significant portfolio inflows.
Concentrated AI trade
It is important to understand that the AI trade is a concentrated trade in a few stocks.
In the USA, Nvidia, Microsoft, Alphabet, Amazon and Meta are leading the AI trade.
The surge in Nvidia stock has pushed its market cap to $5 trillion.
In Taiwan and South Korea, three stocks are attracting the bulk of portfolio flows: TSMC in Taiwan and Samsung and SK Hynix in South Korea.
TSMC has 44% weight in the Taiex. TSMC contributed 64% to Taiex’s 25.73% rally in 2025.
Samsung and SK Hynix combined have 40% weight in Kospi. These two stocks contributed 50% to the 75% rally in the Kospi in 2025. This trend is continuing in 2026.
Kospi is up 55% year-to-date while Taiex is up 35%, despite the West Asia conflict.
This continuing boom in AI trade and the momentum in these markets are triggering portfolio outflows from India.
The relatively high valuations and modest earnings growth in India aided these outflows.
FPIs will turn into big buyers when the AI trade ends
No trend lasts long in the market. The sustained FII selling that we are witnessing now is unlikely to last long.
Many market experts believe that AI stocks are in bubble territory now. So, a correction in this segment is possible at any time.
If, along with this, India’s earnings growth prospects improve, FPIs will turn buyers in India.
It is important to understand that among emerging markets, India has the best long-term growth story and a wide variety of sectors to choose from. Therefore, FIIs turning buyers in India is only a question of time.
Disclaimer: The author of this article is the chief investment strategist at Geojit Investments. This article is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.