FIIs Turn Sellers in Sept 2026; 5 Key Factors Could Reverse Trend

Foreign institutional investors (FIIs) have continued their net selling spree in Indian equities throughout September 2026, offloading a combined ₹18,531 crore so far this month. Meanwhile, domestic institutional investors (DIIs) have stepped in to buy aggressively, investing ₹52,617 crore during the same period. This dynamic highlights the growing role of domestic players in stabilizing the market amid persistent foreign outflows.

Last week alone, from September 21 to 25, FIIs sold shares worth over ₹11,490 crore. This marks the sixth consecutive week of net selling by foreign investors, driven largely by rising US Treasury yields and high crude oil prices. These global factors have prompted FIIs to reassess their positions in emerging markets like India.

Pabitro Mukherjee, Deputy Vice President of Research at Bajaj Broking, noted that sustained FII selling combined with global uncertainties could keep markets volatile. However, he pointed out that continued domestic institutional buying is expected to limit downside risks. Market watchers will closely track developments in Brent crude prices, ongoing US-Iran geopolitical tensions, and the upcoming US second-quarter GDP data for clues on market direction.

Ponmudi R, CEO of Enrich Money, explained that US 10-year Treasury yields crossing the 5.10% mark tightened global financial conditions, making emerging-market assets like Indian equities less attractive. He emphasized that a sharp rise in FII selling complicates prospects for a sustained recovery in India’s stock markets unless global risk sentiment improves and foreign inflows return.

“Oversold market conditions and strong participation by DIIs may support occasional rebounds, but a lasting improvement in sentiment hinges on stabilizing crude oil prices, global yields, geopolitical developments, and a reduction in FII selling,” Ponmudi added.

Several experts have identified five critical factors that could help draw foreign investors back to India:

1. Tax predictability: Seema Srivastava, Senior Research Analyst at SMC Global Securities, stressed that clear, stable tax policies are essential. Recent hikes in capital gains taxes—20% for short-term and 12.5% for long-term gains—along with surcharges and Securities Transaction Tax, have increased the cost of investing. Compared to peers like South Korea and Taiwan, India’s tax regime poses higher friction. Srivastava suggests measures such as grandfathering commitments, rationalizing surcharges, extending tax benefits on debt investments, and streamlining withholding tax and double taxation agreements to reduce these barriers.
2. Regulatory alignment: Frequent changes in ownership norms and fragmented reporting requirements across SEBI, RBI, and custodians have increased compliance burdens. Srivastava recommends a unified digital onboarding process, standardized cross-border KYC procedures, and harmonized reporting timelines. Additionally, relaxing restrictions on offshore hedging instruments such as participatory notes and IFSC GIFT City structures would provide more operational flexibility for foreign asset managers.
3. Market infrastructure and currency dynamics: Experts highlight the need for better rupee-hedging tools, higher stock ownership limits for individual investors, and improved liquidity in corporate bonds. Sugandha Sachdeva, founder of SS WealthStreet, noted that moderating US yields, a more stable rupee, and attractive equity valuations would enhance India’s appeal to FIIs.
4. Global competitiveness: India competes for global capital with markets like Taiwan and South Korea, which have benefited from sectors such as AI and semiconductors. Sachdeva pointed out that diversifying foreign investment into India would require strengthening capabilities in semiconductors, batteries, energy storage, and other deep technologies alongside existing industry strengths.
5. Global macro factors: While India’s growth story remains strong, Sachdeva said that growth alone may not immediately bring back foreign portfolio investors. A combination of steady earnings, reasonable valuations, a stable currency, and easing pressures from oil prices and US bond yields will be necessary to attract sustained foreign capital inflows.

The contrasting trends of FIIs selling and DIIs buying underline the delicate balancing act in Indian equity markets amid global uncertainties. With international investors cautious due to external factors, domestic institutions have played a crucial role in providing stability. However, reversing the outflow trend will depend on improvements in policy clarity, regulatory ease, market infrastructure, and global economic conditions.

Vaamanaa Sethi, who has covered business and stock markets for over four years, reports that ongoing monitoring of these factors by market participants will be vital in the coming weeks. Investors are advised to seek professional guidance before making decisions, given the complex interplay of domestic and international influences shaping market movements.