Foreign institutional investors (FIIs) have pulled close to $64 billion out of Indian equities in the past two years. Lower valuations and a better earnings outlook have not brought them back. According to JM Financial, what is missing may be a sustained fall in crude oil prices.
Record selling streak
FIIs were net sellers of $59.2 billion in the 24 months to September 2026. Adding about $5 billion of outflows so far in October takes the total to roughly $64 billion. In a dataset spanning two decades, this is the longest and deepest selling spell.
By financial year, foreign investors sold $14.9 billion in FY25 and $21.9 billion in FY26. In FY27, including October, they have sold another $17.7 billion.
JM Financial names Brent crude as the key variable. Brent above $105 a barrel has historically gone with sustained FII selling. Selling pressure has tended to ease once it drops below $90. In late October, Brent was at about $115, well above the level that could draw foreign money back.
Valuations matter, but with a delay
The Nifty’s one-year forward price-to-earnings multiple has dropped to 17.1 times, an earnings yield of 5.8%. In September 2024 the multiple was 24.8 times and the earnings yield only 4%.
The brokerage finds that valuations do influence flows, but with a lag. Earnings yield has little link to flows in the same month. It correlates positively with flows four to five months later, and the link has been stronger since 2021. When the Nifty traded at 15 to 18 times forward earnings, the next 12 months saw average inflows of $14.1 billion.
Growth has not stopped the exit either. The economy expanded 7.8% year-on-year in the first quarter of FY27, yet FIIs sold $13.4 billion in that period. History shows the same disconnect. In June 2020, GDP shrank 23.1% and FIIs still bought $4.2 billion. In March 2026, GDP grew 8.6%, but foreign investors sold $15.8 billion, the largest quarterly outflow in the data.
Earnings are improving. Nifty 50 profit growth was 12.9% in the first quarter of FY27, and JM Financial expects 20.6% in the second quarter. It estimates earnings growth of 14.2% for FY27 and 17.9% for FY28. Still, earnings growth has only a small positive link with FII flows, so stronger profits alone are unlikely to cause a quick reversal.
Why oil is the pressure point
Over the full 20 years, Brent has no meaningful relationship with FII flows. The link grows stronger in recent years and at extreme prices.
Since 2016, Brent has averaged above $105 in seven months, and FIIs sold in six of them, with average outflows of $4.1 billion. When Brent was below $75, monthly flows averaged a positive $700 million to $900 million. Since 2021, each 10% fall in Brent has been linked to about $1.5 billion of extra FII inflows in the same month.
The report therefore sets two markers. Brent must fall below $105 to leave the danger zone, and a drop below $90 would signal a more decisive move to neutral conditions. Until then, cheaper valuations may not be enough to offset the risk from costly oil.
The rupee is often blamed for foreign selling, but JM Financial says causation mostly runs the other way. Past FII flows help predict the rupee’s next-month move, while earlier currency moves do not reliably predict flows. “The rupee is a thermometer, not a lever,” the analysts wrote.
Domestic money has cushioned the fall
Domestic institutions have absorbed much of the selling, so the market has not collapsed. Over the past 12 months they bought $91.7 billion, including $53.4 billion by mutual funds, against $39 billion of FII secondary market selling. Since March 2026, domestic institutional investors (DIIs) have bought $56.3 billion, while FIIs sold $32 billion in the secondary market.
FII ownership fell from 19.9% of market capitalisation in March 2016 to 14.2% in June 2026. DII ownership rose from 11.3% to 18.9%, passing foreign holdings in December 2024. This buying has cushioned the market, but it has not brought foreign participation back.
When could FIIs return?
JM Financial’s base case, with a 45% probability, has Brent staying between $100 and $115 a barrel. In that scenario valuations offer support but oil keeps a lid on the market. The first three-month run of inflows would come in January-March 2027. The firm sees FY27 inflows of $15 billion to $20 billion and FY28 inflows of $10 billion to $15 billion.
Easing tensions in West Asia could speed up the recovery, with FY28 inflows of $20 billion to $25 billion. Further escalation could delay the turn and lead to FY28 outflows of about $10 billion.
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