Record monthly outflows from India’s financials deepen market slide

Record foreign outflows from India’s financial stocks in March underscored a deepening retreat by overseas investors, as fears over fallout from the Iran war on economic growth and earnings compounded pressure on Indian equities and the rupee.

Foreign portfolio investors sold 606.55 billion rupees ($6.53 billion) of financial stocks in March, the highest on record and more than half of the total $12.66 billion pulled from Indian markets, according to National Securities Depository data released on Tuesday.

Financials, banks, private lenders and state-owned banks fell 15.5%-20%, dragging the benchmark Nifty 50 index 11.3% lower to its worst monthly performance in six years.

Top private lender HDFC Bank slid 17.6% in March, after the surprise exit of its part-time chairman.

Concerns over potential losses due to the central bank’s decision on March 27 to tighten position limits on forex exposure also intensified foreign outflows, two analysts said.

FPI selling in Indian markets hit a record high of $19.69 billion in the financial year 2026, which ended last month, leaving the Nifty 50 with its weakest fiscal year showing in six years.

“Signs of depletion in local investors’ resources”

The prospect of domestic institutional investors – who have been the market’s shock absorbers against volatile foreign flows – potentially losing their firepower is now further unsettling market participants.

“We are now seeing the first signs of depletion in the resources of DIIs after 18 months of fighting this battle of equity flows,” said analysts led by Vikash Kumar Jain of CLSA on Tuesday.

CLSA said cash held by equity mutual funds stood at 1.78 trillion rupees at the end of February 2026, down 24% from April 2025.

“The market now needs foreign capital back,” the CLSA analysts said, adding that “the set-up of depleted DII reserves and continued (primary market) supply pressures makes the Indian equity market much more dependent on foreign inflows than any time over the past five years to drive up the markets,” CLSA analysts said.