FII outflows from India funds hit $5bn as AI rotation grows

What changed in the March quarter

Foreign investors pulled fresh money from India-focused offshore funds in the March quarter as global allocations tilted toward artificial intelligence-linked markets such as South Korea and Taiwan. Morningstar’s Offshore Fund Spy report showed India-dedicated offshore funds and exchange traded funds (ETFs) recorded net outflows of $1.0 billion over the three months through March. The pace of selling accelerated sharply from the previous quarter’s $1.8 billion of net outflows. The shift came even as some investors pointed to early signs of macro stabilisation in India. But near-term positioning was driven more by where earnings momentum was strongest globally.

Fund flows: acceleration and what it signals

The $1.0 billion March-quarter outflow reflected a clear risk rotation rather than a single India-specific trigger. Reported investor activity suggested global money was seeking more direct exposure to the AI investment cycle via North Asian equities. At the same time, India and China were cited as key “funding” markets for this rotation due to persistent outflows. A separate data point in the report noted India witnessed net outflows of $1.77 billion in the latest week, underscoring that the trend has not been limited to one reporting period. Investors broadly agreed that a sustained recovery in inflows will depend on stronger earnings visibility and clearer macro direction.

AUM fall and the Nifty’s drawdown added to pressure

Morningstar data also showed the asset base of India-focused offshore funds and ETFs fell 19.5% quarter-on-quarter to $17.0 billion from $15.7 billion. The report attributed the fall to a combination of investor redemptions and market declines. During the same quarter, the Nifty 50 fell 14.5%, which mechanically reduced asset values even without withdrawals. This mix matters because AUM declines can amplify outflows as index-linked products rebalance and as investors react to drawdowns. It also highlights that, for offshore vehicles, performance and flows are intertwined.

Why AI-linked North Asia is pulling capital

Morgan Stanley’s Jonathan Garner said foreign institutional investors have been directing capital toward North Asian markets benefiting directly from the AI investment boom. He argued that India’s recent outflows reflect an extraordinary global investment cycle centred on AI infrastructure rather than a simple deterioration in India’s domestic fundamentals. Garner placed the turning point for global capital flows around mid-2024, when enthusiasm for AI infrastructure spending accelerated sharply. He noted India’s relative outperformance versus other emerging markets peaked around September 2024, coinciding with the rise of the AI theme. Morgan Stanley expects North Asia’s earnings advantage to continue through 2027, with any meaningful slowdown likely only in 2028 or later.

Signs of moderation: outflows slowed in recent months

Elara Securities flagged that the global trade of buying AI-linked Asian markets and commodity-heavy economies while selling India may be losing momentum. The brokerage said foreign outflows from India are beginning to moderate as the broader rotation trade shows signs of exhaustion. India-focused fund outflows moderated to $1.702 billion in May, compared with $1.5 billion in April and a historic $1.5 billion in March. India-dedicated funds were also described as stabilising over the past two weeks after nearly $1.0 billion of outflows across 11 consecutive weeks. The note added that while long-only funds still face redemption pressure, ETF inflows have cushioned part of the selling.

The longer exodus and what investors are watching

Beyond the quarter-to-quarter moves, commentary cited a record and prolonged exit by FIIs since late 2024, with roughly nearly $15.0 billion withdrawn. Calendar year 2025 reportedly saw $18.5 billion of outflows, while January to May 2026 saw nearly $10.0 billion pulled out. A key argument in that commentary was that global capital follows earnings growth and that India has not offered the most compelling earnings story within emerging markets during this period. Even so, multiple observers in the broader reporting still described India’s long-term growth narrative as intact, with the near-term challenge being comparative earnings momentum elsewhere.

FDI picture: big gross inflows, weaker net flows

Concerns also extend beyond portfolio flows into the broader foreign capital picture. Data cited in the reporting said India secured foreign direct investment totalling $10.8 billion in the 12 months ending January 2026, up 13% year-on-year. But this was overshadowed by significant repatriation by foreign firms and increased overseas investments by Indian companies, which pushed net FDI to “near all-time lows” in a Morgan Stanley report. Repatriation exceeded $10.0 billion for the second consecutive year. Overseas investments by Indian firms rose to $15.8 billion, a 2.6-fold increase over two years. Another observation in the reporting said capital has been migrating back to developed markets like the US.

What markets are pricing in

Some market commentary said money has flowed to Taiwan and South Korea where AI-linked chip stocks surged, while India’s benchmark was described as down more than 9% this year. Separate reporting cited that India’s representation in the MSCI Emerging Markets index has declined to about 12%, down from around 19% a year prior. It also said foreign investors have pulled out a net total of $11.0 billion from Indian stocks so far in 2026. Goldman Sachs was cited as saying foreign ownership had reached a 14-year low and is now behind domestic institutions for the first time in over two decades. Since Indian markets peaked at nearly $1.0 trillion, about $124.0 billion has been wiped off the value of Indian equities, according to the same reporting.

Key data points at a glance

Analysis: what could reverse the flow

Multiple voices converged on one key point: a sustained recovery in inflows hinges on earnings and macro visibility. One view cited in the reporting said a decisive turn in earnings growth would be the key trigger, while interim macro improvements or events could stem outflows and bring renewed interest. Another view argued that India is now “moderately placed” among emerging markets and that factors like a sharp decline in oil prices, government divestment, global trade dislocations, and growth-oriented policy measures could revive sustained inflows. However, the reporting consistently framed the current rotation as being driven by a rare global earnings cycle in AI-linked sectors. That suggests India’s near-term positioning risk remains tied to how long North Asia’s earnings advantage persists.

Conclusion

The March-quarter data showed a clear acceleration in foreign selling of India-focused offshore funds, alongside a sharp AUM decline magnified by the Nifty’s fall. More recent flow data points to moderation, with ETF inflows helping cushion selling even as long-only funds face redemption pressure. Investors and strategists in the reporting continue to anchor the next turn in flows to earnings momentum and macro clarity. The next few quarters will be watched for whether India’s earnings trajectory improves at the same time as the global AI rotation trade cools.