Foreign portfolio outflows test India's financial markets amid global capital rotation.
NEW DELHI: Foreign portfolio investors pulled a net $13.7 billion from Indian equity markets between April 1 and June 2 2026, RBI Governor Sanjay Malhotra confirmed on June 5. The outflows, which crossed ₹2.2 lakh crore year-to-date in 2026, already exceed the entire ₹1.66 lakh crore withdrawn through all of calendar year 2025. The rupee fell to a record low of 96.14 per dollar on May 15 before recovering partially to 94.85 by late June. India’s foreign exchange reserves declined from $700 billion in April to $682.3 billion by May 29. That is a structured, rational capital reallocation driven by three interlocking forces.
The Global Pivot to AI Hardware
Global institutional capital is moving decisively toward US technology equities and East Asian semiconductor manufacturers. The Vanguard S&P 500 ETF alone attracted $75.69 billion in inflows in 2026. The newly launched Roundhill Memory ETF focused on memory chips, gathered $12.73 billion within months of its April debut. This narrative shift from software to hardware has directly penalised India.
South Korea’s KOSPI, driven by Samsung and SK Hynix, has surged 86% year-to-date despite recording $69 billion in FPI equity outflows, as investors moved into Korean bonds while the index rose on AI demand. Taiwan’s TAIEX, anchored by TSMC is up 45.8%. India’s Nifty 50 by contrast is down 11% in dollar terms.
India’s technology sector is heavily weighted toward legacy IT services rather than semiconductor manufacturing. Global fund managers are concluding that generative AI is compressing revenue for traditional software service providers. India’s top IT firms reported trailing twelve-month constant currency revenue growth of just 1.5% in Q4 FY26.
Valuations That Cannot Hold
The Nifty 50 traded at a trailing price-to-earnings ratio of 21.8x to 22.3x through this period. Even after correction, the one-year forward P/E remained near 18x. South Korea’s KOSPI traded at 8.5x forward earnings. Indonesia’s Jakarta Composite traded at 10x. The premium India commanded assumed strong earnings growth. The earnings delivered something else entirely.
Headline aggregate net profit growth for a broad universe of Indian companies appeared strong at 25.3% year-on-year in Q4 FY26. Institutional analysts quickly stripped out tax adjustments and one-off restructuring gains. What remained was far weaker. Motilal Oswal estimated Nifty 50 earnings grew just 6% year-on-year. JM Financial put profit after tax growth at 4.2%. Both figures represented a collapse from the 15% to 18% growth recorded in earlier quarters. JP Morgan cut its FY27 earnings estimates by 2% to 10% across consumer, automotive and financial sectors.
The Hormuz Shock
Needless to mention what happened on February 28, 2026. That strait handles approximately 20% of global seaborne crude and LNG trade. Brent crude peaked at $126 per barrel in March and has averaged $110 per barrel through April and May. Crisil projects a fiscal year average of $90 to $95 per barrel, roughly 32% above the prior year’s average.
India imports 90% of its crude oil needs. The oil and gas import bill surged 53% in April compared to March. The merchandise trade deficit widened to $28.2 billion in May, up from $22.6 billion a year earlier. Crisil projects the current account deficit will expand to 2.2% of GDP this fiscal year from 0.6% in FY26. The government, absorbing retail fuel price increases rather than passing them through, faces fertilizer subsidy costs rising 20% and an estimated ₹140 billion monthly revenue loss from excise duty cuts. The fiscal deficit is now projected at 4.7% to 4.8% of GDP against a budgeted 4.3%.
The Feedback Loop and the RBI’s Response
The three forces amplify each other. Currency depreciation erodes dollar-denominated returns for FPIs, accelerating equity sales. Rising crude inflates input costs, compressing corporate margins further, making already-expensive valuations harder to justify. That pushes global managers toward markets with cheaper multiples and AI hardware exposure.
What has prevented a full market collapse is domestic retail participation. Systematic Investment Plan flows from mutual funds have absorbed sustained foreign selling, limiting the Nifty 50’s decline to approximately 11%.
The RBI, holding the repo rate steady at 5.25% to protect growth, launched a targeted package on June 5 to attract foreign capital directly. Key measures include bearing the full hedging cost on fresh FCNR(B) deposits of three to five years, opening concessional forex swap windows for PSU external commercial borrowings, liberalising direct equity investment by persons resident outside India and expanding government bonds eligible under the Fully Accessible Route to include all new 15, 30 and 40-year securities. SBI Research estimates this package could draw $40 billion in inflows over coming quarters.
A preliminary peace deal at the Strait of Hormuz was signed on June 18. That have been breached several times since then. whether crude prices retreat toward $80 per barrel, will determine how quickly India’s trade deficit corrects and whether the rupee can recover toward the 92 to 93 range. RBI has bought time, but the structural question of India’s AI hardware exposure still remains open.
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