Foreign investors have been selling Indian stocks aggressively over the last one year. Since early 2025, Foreign Institutional Investors or FIIs have pulled out nearly 21 billion dollars from Indian equities. Even in 2026 so far, net outflows are close to 2 billion dollars. This heavy selling has weakened market sentiment and kept benchmark indices under pressure.
Why are FIIs exiting Indian markets
In 2025 alone, India saw a massive 19 billion dollar FII sell off, one of the worst in recent years. According to market experts, several factors played a role:
- High global interest rates making US bonds more attractive
- Geopolitical uncertainty across regions
- Complex tax rules and regulatory friction in India
As a result, key indices like Nifty 50 and Sensex corrected sharply, and many large cap stocks are still struggling to recover.
Ridham Desai’s solution Focus on capital market reforms
Morgan Stanley’s India strategist Ridham Desai believes the trend can be reversed if the government takes bold steps in Union Budget 2026. He has suggested three clear reforms that could make Indian markets attractive again for global investors.
1. Widen access for Foreign Portfolio Investors
Desai recommends simplifying entry rules for Foreign Portfolio Investors or FPIs. Currently, overseas funds face heavy paperwork and compliance hurdles.
Direct answer: Easier and faster registration for FPIs can reduce friction and encourage fresh foreign inflows into Indian stocks.
2. Simplify share buyback taxation
India’s current buyback tax structure is considered unfriendly. Companies are discouraged from returning excess cash to shareholders due to high tax costs.
Direct answer: Simplifying buyback taxation can boost shareholder returns and attract yield seeking foreign investors.
3. Strengthen tax incentives in GIFT City
GIFT City in Gujarat is India’s global financial hub, but it still lacks the competitiveness of Singapore or Dubai.
Direct answer: Better tax incentives and smoother processes in GIFT City can position India as a global financial destination.
How these reforms can bring FIIs back
According to Ridham Desai, these reforms can significantly improve ease of doing business for foreign investors. Lower tax friction and simpler rules can restore confidence in Indian markets.
If foreign money returns:
- Market valuations could improve
- Rupee stability may increase
- Growth stocks could see renewed interest
Morgan Stanley believes decisive action in Budget 2026 could trigger fresh foreign inflows and set the stage for a stronger market rally.
FII Stake in NSE Companies Continues to Fall
Foreign Institutional Investor ownership in NSE listed companies declined further in September 2025. FII holding slipped to 16.71 percent from 17.05 percent in June, indicating sustained profit booking and cautious positioning due to global market volatility.
The total value of FII investments dropped by Rs 3.38 lakh crore to Rs 74.20 lakh crore during the quarter. The free float FII share also fell from 34.08 percent to 33.43 percent, while FIIs share in total market trading volumes eased to 5.65 percent, reflecting softer foreign participation in daily trades.
What investors should watch next
All eyes are now on the Union Budget 2026. The key question remains whether the government will act on these capital market reforms.
Bottom line: If these three changes are implemented, India could once again become a top destination for global capital.
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