Foreign institutional investors (FIIs) have shown a stark divergence in their investment strategy towards Indian markets, injecting a substantial $22 billion into primary market opportunities like Initial Public Offerings (IPOs) over the past two years while simultaneously withdrawing $50 billion from listed equities. This contrasting flow, detailed in Motilal Oswal Financial Services' November 2026 India Strategy report, has resulted in a net outflow of $28 billion between October 2024 and October 2026.
This trend marks a significant shift from the preceding eight-year period (November 2016 to September 2024), when foreign investors contributed $51 billion to primary markets and $56 billion to secondary markets, demonstrating a more balanced approach.
Why the Discrepancy?
The report suggests several potential reasons behind FIIs' preference for new share issuances over existing listed stocks. One primary explanation points to foreign investors becoming increasingly selective, focusing on specific valuations and growth prospects. Primary market investments offer institutional investors the chance to meticulously evaluate individual businesses, their future growth potential, and the offered valuations.
However, it’s important to note that these primary market inflows do not necessarily indicate that investors perceive IPOs as inherently cheaper than established listed companies. Instead, selling pressure in the secondary market likely reflects broader portfolio adjustments, global risk aversion, and ongoing concerns regarding Indian equity valuations.
Sectoral Shifts and Outflows
The withdrawal of foreign capital has not been uniform across all sectors. During the calendar year 2026 through October, FIIs pulled a total of $30.4 billion from Indian equities. Financial services bore the brunt of these outflows, accounting for $13.2 billion. This was followed by the automobile sector, which saw $4.9 billion in withdrawals, and Fast-Moving Consumer Goods (FMCG) with $4.5 billion in exits.
Conversely, some sectors managed to attract foreign capital. Services drew $1.4 billion, metals received $1.3 billion, and capital goods saw inflows of $1.1 billion. These varied sectoral movements indicate that foreign investors are not uniformly pessimistic about all Indian businesses.
Signs of Improving Sentiment?
Motilal Oswal's report highlighted a notable turnaround in foreign investor activity during October 2026. Although FIIs recorded a net withdrawal of $2.2 billion for the entire month, they actually invested $2.8 billion in the latter half, offsetting a $5 billion outflow in the first two weeks. This partial recovery suggests a potential shift in sentiment.
Adding to the positive outlook, domestic institutional investors (DIIs) continued their robust buying streak, investing $6.3 billion in October, marking their 39th consecutive month of net inflows. The brokerage firm believes that improving corporate earnings, relatively attractive valuations, and strong domestic liquidity could collectively encourage renewed foreign participation in the broader Indian equity market.
Guidance for Retail Investors
For retail investors, the report offers crucial advice:
- IPO Demand: Strong institutional demand for an IPO should not automatically be seen as a guarantee of attractive valuations or listing gains. Thoroughly examine a company's profitability, financial disclosures, pricing, and long-term growth prospects before subscribing.
- FII Selling: Persistent FII selling in listed stocks does not automatically render those equities unattractive. Investors should conduct their own due diligence and assess the fundamentals independently.