Foreign portfolio investors’ shareholding in Indian equities has fallen to a two-decade low, dropping below that of domestic institutional investors, driven by the relative underperformance of Indian stocks and sustained capital outflows over an extended period.
The ownership of FPI in Indian equities has dropped to 16 per cent while that of DIIs was at 20 per cent as of March-end, according to the RBI Financial Stability report.
FPI equity outflows of $31 billion in 2026 have exceeded the prior record of $19 billion in 2025, marking the highest level observed in the past two-and-a-half decades.
A combination of rich equity valuations, lack of AI trade and relatively lower earnings growth has affected investor sentiment. The assets under custody (AUC) of FPIs in the equity segment moderated to about ₹68 lakh crore in May from about ₹74 lakh crore last December.
The decline in the AUC of about ₹7 lakh crore over the period, was primarily driven by valuation losses of about ₹5 lakh crore, while net outflows contributed around ₹2 lakh crore to the overall erosion. Furthermore, FPIs’ portfolio allocation trend indicates a moderation in India’s share within the emerging market funds, said the report.
The domestic equity market, which trailed its emerging market peers since last year, fell amid concerns about India’s exposure to the supply shock and the attendant softening in corporate earnings growth. Earnings’ growth differential of India compared to emerging markets has dropped below its long-term average.
Notwithstanding the sharp correction in equity markets, its resilience has improved considerably. Analysis of the worst drawdown over 5-day period across multiple crisis episodes showed that it was the lowest in the current episode, said the report.
The rising support from domestic institutional investors such as mutual funds, insurers and pension funds has strengthened domestic equity market resilience.
The recent decline in equity markets has moderated previously elevated valuations, bringing them closer to historical average. Alongside, earning projections for 2026 have been revised downwards, except for the smallcap index.
However, Indian equities continue to trade at a premium compared to their emerging market peers. The recent fall in market has reduced Nifty 50 returns, reversing earlier gains driven by equity risk premium compression, as heightened investor risk aversion has pushed risk premia higher, said the RBI report.