Capital flight tests market resilience

Driven by global uncertainties, rising oil prices, and a weakening rupee, FDI outflows are raising concerns about the resilience of India’s markets

Far from the hustle and bustle of elections, Indian markets are bleeding. In January 2026, over 400 stocks with a market capitalisation of at least USD 1 billion declined by more than 20 per cent from their peaks, with some falling as much as 71 per cent. As of mid-January 2026, the market experienced a sharp decline, with some reports indicating a 5 per cent loss for the month. This is not a one-time event, but a trend that is becoming increasingly pronounced. The reason, of course, is the flight of capital from the country, as foreign investors have been withdrawing heavily. Foreign Portfolio Investor (FPI) outflows from India were over Rs 60,000 crore in April alone and nearly Rs 2 lakh crore in the first four months of 2026. This is not routine. If this continues unabated, the Indian economy may slide back, and growth projections may have to be revised.

It is true that the Indian story is still going strong, and there is demand in the market, which gives impetus to manufacturing, while many sectors are performing well. India’s macroeconomic fundamentals — steady growth, improving infrastructure, and a large domestic market — remain intact. But there are factors eroding profits, and many of them are beyond control. Crude oil prices are rising amid tensions in West Asia. Rising oil prices widen the current account deficit and put pressure on the rupee. The recent slide of the rupee, breaching the Rs 95 mark, has left investors anxious. Currency depreciation is an important marker for foreign investors, as it eats into their profits, and the Indian rupee is making new lows rather frequently.

Besides, changes in US banking policies are yet another reason. Interest rates in the US are going down. Large institutional investors would not like to take risks in emerging markets when safer assets back home offer competitive returns. The only saving grace for Indian markets is the Domestic Institutional Investors (DIIs), who have played a stabilising role. Their buying has cushioned the impact of foreign outflows. If FPI outflows continue, they will have far-reaching implications for the Indian economy. They exert downward pressure on the rupee and raise inflation.

The big question is: what can be done to check the outflow and instil a sense of confidence among foreign investors? First, containing inflation and managing the current account deficit - especially by diversifying energy sources - can reduce vulnerability to external shocks. Overdependence on imported oil must end. Second, exchange rate management requires careful calibration. While the Reserve Bank of India interventions have helped smooth volatility, excessive defence of the currency can deplete reserves. A balanced approach that allows for gradual adjustment may be the best strategy. Third, foreign investors value predictability. Continued reforms in taxation, ease of doing business, and financial sector regulation can reinforce confidence even during periods of global uncertainty. Finally, India must continue to deepen its domestic financial markets. Indeed, the current episode of outflows is not a verdict on India’s economic fundamentals. The challenge is to ensure that India remains among the most attractive destinations for capital in the long run.