The trend of foreign portfolio investors (FPIs) withdrawing funds from the Indian real estate and automobile sectors has intensified significantly in recent weeks. Data released by the National Securities Depository Limited (NSDL) indicates that during the second half of March, FPIs divested ₹7,691 crore from the automobile sector and ₹2,560 crore from real estate. This marks a notable increase in outflows compared to the first half of March, where the figures stood at ₹4,807 crore and ₹2,133 crore, respectively. Additionally, the construction and consumer services sectors experienced substantial withdrawals, amounting to ₹6,179 crore and ₹2,672 crore, respectively. FPIs also reduced their stakes in fast-moving consumer goods (FMCG) companies, leading to an outflow of ₹3,016 crore, up from ₹2,403 crore earlier in the month.
The recent geopolitical climate, particularly the onset of the conflict involving Iran, has further exacerbated the volatility in FPI flows. According to Abhishek Saraf, Lead Equity Strategist at Motilal Oswal Financial Services, February had shown a positive trend with inflows of $1.7 billion; however, the emerging conflict resulted in an alarming $14.2 billion being pulled out in March alone. Cumulatively, this has pushed total outflows to $15.8 billion for the fiscal year 2026. Saraf posits that once the situation stabilizes, there is potential for improved FPI inflows, which could lead to a more favorable market environment. If positive inflows resume, it may trigger significant market rallies.
The Indian equity market has faced a notable correction of around 10 percent since the conflict erupted, leading to more attractive valuations. Currently, the Nifty index is trading at 18 times earnings, which represents a 14 percent discount to its long-term average of 20.9 times. Despite this, the Indian market has recorded a 3 percent decline, contrasting with a 31 percent increase in the MSCI Emerging Markets Index. This disparity highlights a 34 percent underperformance in the Indian market over the fiscal year 2026, marking the most pronounced underperformance in two decades. Furthermore, the valuation premium of the Indian market compared to other emerging markets has decreased to 27 percent, significantly lower than the ten-year average of 73 percent.
In terms of total assets under custody (AUC), FPIs have seen a dramatic decline of 16 percent, dropping from ₹74.76 lakh crore at the end of December to ₹62.46 lakh crore by March-end. The AUC for the IT and financial services sectors has also suffered, with declines of 27 percent and 21 percent, respectively. These trends underscore the challenges facing FPIs in the current economic landscape, as investors reassess their positions amid geopolitical uncertainties and shifting market dynamics.