Shares are cheap, yet why are FIIs fleeing? This is the real problem of withdrawal of foreign funds in the market.

Foreign institutional investors (FIIs) have withdrawn nearly $64 billion from Indian equities in the last two years. After which Indian stock market valuations fell significantly and many stocks became very cheap. Earning capacity has also increased a lot. However, foreign investors have not returned. According to JM Financial, the main reason for this could be the lack of sustained decline in crude oil prices.

In the 24 months to September 2026, FIIs sold a total of $59.2 billion. Including outflows of about $5 billion so far in October, these total withdrawals have reached about $64 billion. If we look at the data of the last two decades, this is the longest and biggest selloff ever. Foreign investors sold $14.9 billion in FY25, $21.9 billion in FY26 and $17.7 billion in FY27 (including October sales).

According to the report, Brent crude price is an important parameter for foreign investment inflows. Historically, FIIs have consistently sold when Brent crude prices are above $105 per barrel. At the same time, when the price falls below $90 per barrel, selling pressure begins to ease. At the end of October, the price of Brent crude was around $115 per barrel, well above the level where a large withdrawal of foreign capital can be expected.

Cheap Nifty vs FII Exit

Nifty’s one-year forward ‘price-to-earnings’ (P/E) multiple has fallen to 17.1 times, implying an earnings yield of 5.8%. This is lower than the 24.8x multiple reported in September 2024, when the earnings yield was just 4%. JM Financial’s analysis shows that valuations are important, but the impact is visible after a while. A month’s earnings yield has little correlation with FII inflows (investment inflows or outflows) in the same month, but it has a positive correlation with inflows four to five months later. From 2021 this relationship has become stronger. Whenever the Nifty trades between 15 and 18 times its forward earnings, an average of $14.1 billion comes in over the following 12 months.

India’s economic growth has also failed to stem the outflow of FIIs. The economy grew 7.8% year-on-year in the first quarter of fiscal 2027, while FIIs sold $13.4 billion during the same period. This difference is more pronounced in the older examples reported. In June 2020, India’s GDP shrank by 23.1%, but FIIs bought $4.2 billion. In March 2026, GDP grew 8.6%, yet foreign investors sold $15.8 billion—the largest outflow of any quarter in this dataset.

Earnings of companies are also improving. The Nifty 50 gained 12.9% year-on-year in the first quarter of FY27, while JM Financial expects a 20.6% growth in the second quarter. They estimate earnings growth to be 14.2% in FY2027 and 17.9% in FY2028. Earnings growth has only a marginally positive relationship with FII inflows. Better profits may make market valuations attractive, but this alone does not immediately change investment trends.

Why is oil really the main cause of pressure?

1. Over the past 20 years, there has been no significant correlation between Brent crude and FII (foreign institutional investors) investment flows. In recent years and with prices reaching very high levels, this relationship has become very important.
2. Since 2016, Brent has averaged above $105 a barrel in seven months. During the six months, FIIs sold, leaving an average capital of $4.1 billion.
3. In comparison, when Brent was priced below $75, there was an average investment (flow) of $700 million to $900 million per month. From 2021, a 10% drop in Brent prices has resulted in additional FII inflows of around $1.5 billion a month.
4. Therefore, this report identifies two important levels of crude oil prices. To get out of the ‘danger zone’, the price of Brent must fall below $105. At the same time, a drop below $90 would be a big step towards making the situation more balanced (neutral).
5. Until then, the decline in prices will not be enough to offset the macroeconomic risks posed by higher oil prices. It is often assumed that the rupee affects the flow of foreign investment. But JM Financial’s analysis shows that the opposite is actually true.
6. Based on the previous FII investment, one can predict the movement of the rupee in the next month, but the FII investment cannot be correctly predicted from the previous changes in the rupee. Analysts have written that the rupee is like a thermometer, not a lever that can control things.
7. Despite the withdrawal of FIIs, there was no major decline in the market, as domestic institutional investors (DIIs) accounted for a large portion of this sell-off. In the last 12 months, domestic investors bought $91.7 billion (including $53.4 billion in purchases by mutual funds), while FIIs sold $39 billion in the secondary market during the same period.
8. Since March 2026, DIIs have bought $56.3 billion, while FIIs have sold $32 billion in the secondary market during the same period. The share of FIIs in the market capitalization was 19.9% ​​in March 2016, which declined to 14.2% in June 2026.
9. At the same time, DII’s share increased from 11.3% to 18.9% and overtook foreign investors in December 2024. But domestic purchases have largely supported the market and there has been no significant improvement in foreign participation.

When can FII come back?

According to JM Financial’s base case, there is a 45% chance that the price of Brent crude oil will remain between $100 and $115 per barrel. In this scenario, valuations will provide support, but oil prices will limit the market’s upside. In such a scenario, for the first time, three consecutive months of inflows can be seen during January-March 2027.

In this scenario, the company estimates inflows of $15 billion to $20 billion in fiscal 2027 and $10 billion to $15 billion in fiscal 2028. If tensions ease in West Asia, recovery may come sooner, leading to further inflows of $20 billion to $25 billion in FY2028, but if this could pick up again in FY28. has been postponed and could see an outflow of about $10 billion in fiscal 2028.