FII’s comeback in 2026 was the bet, but the Rs 12,000 crore exit is scaring off investors. What now?

According to most analysts, the new year was intended as a turning point for foreign investors. After a roaring 2025, the dominant market narrative in early 2026 was that foreign institutional investors would finally become buyers, helped by better domestic growth prospects, expectations of better corporate earnings and hopes for progress on the long-pending India-US trade deal.Instead, the opposite has happened. In the first nine days of January alone, financial institutions sold nearly Rs 12,000 crore worth of equities, causing unrest in the markets and reviving fears of a prolonged risk phase.

VK Vijayakumar, Chief Investment Strategist at Geojit Investments, said the sale is a continuation of last year’s trend rather than a sudden shock. “In 2025, FIIs had net sold shares worth Rs 1.66 lakh crore, which impacted the performance of the Indian market and also weakened the rupee by around 5%,” he said.The expectation that foreign flows would reverse in early 2026 was based on assumptions that are now being questioned.

What went wrong?

One important trigger has been geopolitics. Investors were hoping that the much-delayed US-India trade deal would become a reality early this year. Instead, developments went in the opposite direction. The US intervention in Venezuela, the lack of positive movement in trade talks and negative comments from the US Commerce Secretary have fueled fears that an agreement could be pushed further out.

“This affected market sentiment and FIIs continued to sell, increasing sales volume in the last two trading days,” Vijayakumar noted. The impact on stocks was swift. Despite strong buying by domestic institutional investors (DIIs), who infused nearly Rs 17,900 crore in January through January 9, the markets failed to sustain. The Nifty lost 618 points in the week ending January 9.

The broader market backdrop has also turned hostile. Indian stocks saw a sharp sell-off last week, due to weak global signals and rising uncertainty around trade and geopolitics. The Sensex fell 2.55% to 83,576, while the Nifty fell 2.45% to 25,683, marking one of the steepest weekly declines in recent months. Broader indices underperformed, reflecting clear risk aversion among investors.

Ironically, domestic fundamentals have remained stable. The National Statistical Office (NSO) forecast India’s GDP growth for FY26 at 7.4%, supported by steady momentum in the services and manufacturing sectors. India Ratings expects growth of 6.9% in FY27, citing reforms such as GST, income tax cuts and FTAs ​​as structural positives.

Yet, as the past week has shown, global factors continue to dominate local positive developments. Sectors sensitive to global growth and policy uncertainty suffered the most from sales. Energy, metals and real estate stocks emerged as major laggards, while banking stocks also weakened due to continued financial outflows. Even relatively defensive segments such as IT and pharmaceuticals ended lower, reflecting global market weakness.

From a technical perspective, Ajit Mishra, SVP at Religare Broking, said the sharp decline has broken the short-term uptrend of the Nifty. “The index is now retesting its medium-term support near the 25,600 level. A decisive break below this zone could extend the decline to 25,300 and then to 25,150,” he said.

While oversold indicators could trigger a near-term rebound, Mishra warned that any recovery could struggle to sustain above 26,000.

Will FIIs come back?

Analysts say returns could depend on three key variables: clarity on India-US trade ties, stability in global geopolitics and confidence in earnings growth.

If trade tensions ease and corporate earnings indicate a recovery in demand, foreign investors may reconsider their stance, especially given India’s relative growth advantage. However, until there is visible progress on these fronts, caution will likely prevail.

For the time being, market experts advise restraint. “In the current environment of heightened volatility and global uncertainty, a cautious and disciplined approach is advisable. While bargain hunting could lead to periodic rebounds after the sharp correction, sustained upside is likely to be limited until further clarity emerges on earnings, global trade developments and FII flows,” Mishra said.

“Investors should focus on capital preservation, maintain higher exposure to high-quality large-cap stocks and avoid aggressive positions in high-beta or leveraged names. Traders can tactically seek to participate in short-term technical upswings, but should adhere to strict risk management and stop-loss discipline,” he added.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of Economic Times)