FII selling accelerates in January 2026, domestic flows cushion Indian markets, says report

Foreign institutional investor (FII) selling intensified in January 2026, exerting pressure on Indian equities and pulling the Nifty down about 2.4% during the month. According to BNP Paribas’ latest India Strategy – Flows Tracker report, foreign outflows were the dominant force in the market even as domestic investors continued to provide support.

“FII selling accelerated in Jan-26, pulling the Nifty down about 2.4%. DIIs buying continued, buoyed by cINR300bn of SIP inflows. Mutual fund inflows, however, slipped 14% m-m, as some of the flows shifted towards Gold ETF, which saw monthly inflows similar to equity inflows, vs negligible flows before the gold rally began,” said Kunal Vora, Head of India Equity Research.

January outflow, inflow

In January, FIIs sold approximately $3.3 billion worth of Indian equities. In contrast, domestic institutional investors (DIIs) bought around $7.6 billion, effectively absorbing the foreign selling. Systematic Investment Plan (SIP) contributions remained steady at roughly Rs 300–310 billion per month, highlighting the growing structural strength of domestic retail participation.

However, overall mutual fund inflows declined 14% month-on-month and remain well below their July 2025 peak. A key shift during the month was the surge in Gold ETF inflows. As gold prices rallied sharply, investor allocations to gold doubled sequentially, with monthly inflows into Gold ETFs matching those into equity-oriented schemes — a significant change from earlier periods when gold allocations were negligible.

Despite the weak start to the year, sentiment improved toward the end of January and into early February following a series of positive macro and policy developments.

“Late Jan/early Feb brought some positive developments for Indian equities: 1) India’s trade deal with the EU and interim deal with the US; 2) a balanced FY27 budget that leans on higher capex; and 3) improvement in economic indicators and earnings outlook. We now see tailwinds for consumption, capex as well as exports,” Vora said.

Trade agreements

The India-EU free trade agreement and interim trade arrangement with the United States are expected to boost exports, particularly in labour-intensive sectors such as textiles and manufacturing. Meanwhile, the FY27 Union Budget balanced consumption support with a renewed emphasis on capital expenditure, after relatively muted capex growth in FY26. The combination of policy clarity and fiscal support has improved earnings visibility.

On the macro front, indicators such as credit and deposit growth, industrial production, auto sales, port traffic, fuel consumption and consumer sentiment have shown signs of recovery. Corporate earnings trends have also improved, reinforcing the case for a better equity outlook compared to six months ago.

These positive developments triggered a shift in foreign investor behaviour. Following the announcements, FIIs turned net buyers, purchasing roughly USD 2.8 billion worth of equities in late January and early February. During the same period, DII buying moderated to about USD 0.5 billion, suggesting some normalisation of domestic flows as foreign sentiment improved.

Still, global comparisons continue to influence foreign allocations.

“In our investor meetings in HK/SG last week, we saw FIIs being more receptive to the India story vs Nov-25, but they continued to see better opportunities elsewhere in the region and did not seem to fully share our excitement,” Vora added.

The broader takeaway is that while domestic flows — particularly SIPs — remain a strong structural anchor for Indian markets, foreign participation remains sensitive to global opportunities and relative valuations. January’s volatility underscores that India’s equity trajectory will continue to be shaped by the interplay between resilient domestic inflows and cyclical foreign capital movements.