Foreign Investors Exit India as Domestic Funds Dominate; AI Shift Expected

• FPI stake in Indian listed companies dropped to 15.5%, lowest since 2011, with $17.97 billion withdrawn in 2025.
• Despite FPI selling, Indian markets (Sensex, Nifty) gained 9% due to strong domestic institutional investor (DII) inflows of over INR 7.63 lakh crore.
• DIIs now hold a record 18.26% stake, surpassing FPIs, indicating domestic capital is now the primary market support.
• High valuations and corporate earnings cuts led FPIs to reduce risk; MSCI India's premium over MSCI EM has fallen, potentially signaling better 2026 performance.
• As the AI rally slows, strategists anticipate foreign investors will shift focus back to Indian sectors like Industrials, Consumer Discretionary, and Financials.

Why It Matters: Domestic investors now drive Indian market growth as foreign funds withdraw, with a potential FPI return post-AI slowdown.