FPI outflows 2026: Kamath flags taxes, valuations

Foreign selling turns persistent in early FY2026

Foreign portfolio investors (FPIs) have continued to sell Indian equities aggressively, adding pressure on local indices even as domestic money remains active. Zerodha co-founder and CEO Nithin Kamath has pointed to what he called a “harsh reality” based on industry feedback: global investor enthusiasm for India has “pretty much died out”. The selling comes against a backdrop of heightened West Asia tensions, elevated valuations in Indian equities, and a tax regime that market participants say has become less competitive. The rupee’s vulnerability during global shocks has also become a key part of the risk assessment for dollar-based investors. While the market has seen intermittent corrections, the narrative in the data and commentary is that foreign flows remain cautious. At the same time, several voices in the market have argued that the outflow looks more like a global risk-off response than a rejection of India’s underlying fundamentals.

What the flow numbers show so far

The reported pace of FPI withdrawal in FY2026 has drawn attention because it has already exceeded the prior year’s pace in some datasets. A transcript cited FY2026 outflows of ₹177,000 crore so far, versus ₹166,000 crore of outflows across 2025. Another data point in the same overall coverage said FPIs have withdrawn nearly ₹155,000 crore from domestic equities this year, highlighting that estimates vary by source and classification. March 2026 stood out for the scale of selling, with the transcript citing ₹117,000 crore of outflows in March alone, described as the highest monthly selling on record. Separately, NSDL-linked data cited equity selling worth ₹117,775 crore during March. The selling streak was also described as continuing for 23 consecutive sessions into April, underlining how persistent the risk-off trade has been.

Kamath’s diagnosis: a cluster of global and local headwinds

Kamath’s core argument is that multiple forces are hitting foreign appetite at the same time, rather than a single trigger. He flagged geopolitical exposure through oil, rich valuations compared with other markets, taxes that reduce post-tax returns, the lack of meaningful listed “pure-play” AI opportunities, and pressure on the rupee during global shocks. In the transcript, he also suggested that if India wants to attract FPIs back, the tax structure is “low-hanging fruit” because it is an actionable domestic lever. But the coverage also included a counterpoint: experts said taxes alone will not solve the problem, and India needs structural reforms in land, labour, and agriculture, along with a credible growth acceleration story. This framing matters because it separates short-term flow drivers from longer-term competitiveness. It also explains why India can see heavy foreign selling even when domestic participation remains strong.

Geopolitical risks and India’s oil sensitivity

One of the biggest macro risks cited was escalating tension in West Asia, including Iran, Israel, and the US, which can push crude prices higher. Kamath and other market observers linked higher crude to inflation risks and currency pressure. India’s dependence on imported oil was stated at around 88% of requirements, which makes oil a key macro variable for growth expectations and corporate margins. In periods of geopolitical stress, global investors often shift toward capital preservation, increasing demand for perceived safe havens. A market expert, Ross Maxwell of V T Markets, described the pullback as a risk-off strategy rather than a judgement on India’s fundamentals. The broader point in the coverage was that emerging markets tend to see outflows when geopolitical risk rises, especially when the macro transmission channel is as direct as oil and currency.

Valuations and relative attractiveness versus peers

Valuation was repeatedly cited as a central reason for why India gets sold faster when global uncertainty rises. The transcript said the Nifty 50 still trades at elevated multiples compared to emerging market peers even after corrections. A separate table in the provided text referenced a “Buffett Ratio” at 115% as a marker of rich market valuations. The logic presented is straightforward: when markets look expensive and volatility rises, investors prefer to reduce exposure to pricier risk assets first. Another strand of the coverage said India has delivered comparatively weaker returns than several developed and emerging markets over the past 18 months, which can influence allocation decisions. Markets such as South Korea, Taiwan and China were cited as more attractive destinations in this cycle.

Tax and policy friction: LTCG, STCG and STT

Taxation came through as the most direct domestic policy lever in the discussion. Kamath highlighted India’s capital gains tax structure, including long-term capital gains (LTCG), short-term capital gains (STCG), and the securities transaction tax (STT), as factors reducing net returns. The text referenced the 2024 Union Budget decision to increase LTCG tax on equities from 10% to 12.5%, which several market experts have criticised as potentially discouraging foreign investment. In the transcript, the argument was that tax changes make India look less attractive versus markets like Japan, Taiwan, Korea, and Europe, where FPI money is described as flowing. Nomura was cited as backing this positioning and recommending FIIs invest in Taiwan and China, while also cutting its Nifty target by 15%. The broader implication is that post-tax returns matter more when currency risk and valuation risk are already elevated.

AI as an allocation theme and India’s listed opportunity gap

Another factor highlighted was the global rush toward artificial intelligence (AI) and the related investment ecosystem. The transcript and supporting text argued that India is perceived as lacking significant AI-related “pure-play” investment opportunities compared with other Asian markets. One section described capital moving toward AI infrastructure themes such as semiconductors, cloud infrastructure, and high-performance computing, and implied that markets offering direct listed exposure draw a larger share of incremental flows. This is presented less as a judgement on India’s demand conditions and more as an investability constraint in public markets. In this framing, India can retain strong macro fundamentals while still losing flow share to markets seen as more directly linked to the current technology cycle.

Rupee strain, dollar returns and a risk-off backdrop

Currency risk was repeatedly mentioned as an amplifier of foreign selling. The text described the rupee as facing “immense strain amid global shocks” and also noted that it has been one of the weaker emerging market currencies in this context. For foreign investors, a weaker rupee can erode dollar-denominated returns even if local prices hold up. The broader risk-off backdrop included a stronger US dollar and rising bond yields, which can pull capital toward US treasuries and other developed-market assets. This mechanism helps explain why outflows can occur even if domestic indicators remain stable. It also links back to the valuation point: when returns are compressed by taxes and currency movement, the hurdle rate for staying invested rises.

Domestic investors provide a cushion as holdings shift

While FPIs have sold, the coverage emphasised the counterweight from domestic institutional investors (DIIs), including mutual funds, insurers, and pension funds. For the first time in five years, DII holdings were reported to have surpassed foreign holdings, signalling a structural shift in market ownership. The text said DIIs have been on a consistent buying spree, absorbing outflows and preventing a sharper correction. This has been positioned as a key reason Indian equities have remained relatively resilient in periods of foreign selling. Some market leaders also pointed to strong international participation in primary markets (IPOs) as a sign that overseas interest has not disappeared completely, even if secondary market flows are negative.

Market impact and why the story matters now

The immediate market impact described in the text is heavy foreign selling pressure, with March flagged as a record month for FPI withdrawals and selling continuing into April. The drivers combine into a common outcome: a less attractive risk-reward profile for foreign investors once valuations, taxes, and currency effects are taken together. For policymakers and market participants, the debate has sharpened around what is cyclical versus what is structural. Kamath’s “low-hanging fruit” argument puts tax simplification in focus, while others argue India needs deeper reforms in land, labour, and agriculture to improve long-term competitiveness. In the near term, the key stabiliser highlighted is domestic buying, which has helped offset foreign selling in the secondary market. The next decisive variable, as framed in the coverage, may be whether geopolitical risk eases and whether policy signals improve the after-tax return equation.

Conclusion

The current phase of FPI selling has been attributed to a mix of rich valuations, West Asia-linked oil risk, tax friction, a perceived lack of listed AI plays, and currency pressure. Kamath’s comments capture how quickly sentiment can shift when several headwinds arrive together. At the same time, the rise of domestic institutional investors has reduced the market’s dependence on foreign flows, offering a buffer during risk-off episodes. The next cues will likely come from global geopolitical developments, currency and crude trends, and any further moves on the tax framework and broader structural reforms discussed by market participants.