FPIs preferring debt over equity amid global volatility, says Economic Survey

FPI flows swing in FY26 as equity outflows persist

• FPIs sold Indian equities but bought debt securities in FY26 so far, says Survey
• FPI equity outflows driven by rupee depreciation, global risk-off, and US yields
• FPI debt inflows outlook positive due to SEBI norms and India-US trade talks

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Foreign portfolio investors buy Indian debt securities, while offloading equities in FY26 so far, noted the Economic Survey 2025-26. The Survey noted that during the financial year, foreign portfolio investor flows have been volatile.

Factors driving FPI sell-off in equities

The relative underperformance of Indian equities compared to other major markets, alongside trade and policy uncertainties, the depreciation of the Indian rupee, and a broad-based global risk-off sentiment amid elevated U.S. bond yields, weighed on FPI flows.

"These factors dampened sentiment towards Indian equities, particularly export-oriented sectors such as IT and healthcare, resulting in continued FPI outflows in FY26 (April-December)," noted the Survey.

Equities versus debt

In the first quarter of the year, FPIs were net buyers of Indian equities but net sellers of debt. This trend reversed in the second and third quarters, with FPIs turning net sellers of equities while increasing their purchases of debt instruments.

As of January 13, 2026, FPIs have remained net sellers of Indian equities, with outflows of around Rs 16,500 crore. Overall, foreign investors were net sellers of Indian securities between April and December 2025.

The shift in debt flows has been influenced by movements in bond yield spreads. In late May 2025, the gap between 10-year Indian and US government bond yields narrowed to about 165 basis points due to a stronger US dollar and lower Indian yields, making Indian debt less attractive. By the end of 2025, rising Indian yields and a weaker dollar widened the spread to around 250 basis points, improving the appeal of Indian bonds.

Outlook

As of 31 December 2025, the asset base under custody of FPIs stood at Rs 81.4 lakh crore, marking a 10.4 per cent increase over March 31, 2025, driven largely by valuation gains in equities and steady accumulation in debt holdings.

"Supported by SEBI’s relaxation of FPI investment norms and ongoing India-US trade discussions, the outlook for FPI inflows into India’s debt market remains positive," added the Survey. However, within NSE-listed equities, however, the share of FPI ownership declined to 16.9 per cent (for Q2 FY26), in line with global risk aversion and sectoral reallocations.

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