Why Foreign Capital Could Return to India in 2026?

After a prolonged phase of volatility and risk aversion in global markets, India could see a gradual return of foreign capital in 2026, supported by resilient macro fundamentals, easing valuation concerns and improving long-term growth visibility, according to market experts.

Foreign portfolio investors (FPIs) were net sellers in Indian equities through much of 2025, with outflows estimated at nearly $20 billion, even as foreign direct investment (FDI) remained relatively steady. The divergence reflected global caution rather than India-specific weakness, experts say.

2025 Was A Year of Caution for Global Investors

“As we begin 2026, the behaviour of foreign capital remains a key topic of discussion,” said B L Bajaj, Managing Director, Dynamic Orbits Consultants Pvt. Ltd, noting that global investors adopted a risk-off stance amid geopolitical uncertainty, elevated valuations and concerns over supply-chain disruptions.

Bajaj said that inflation- and currency-adjusted returns from Indian public markets remained in single digits in 2025, reinforcing investor caution. However, he added that the outlook is turning more constructive as India continues to grow at around 7% despite tariff headwinds and a challenging global environment.

“Expected earnings growth, without a proportionate rise in market capitalisation, should help bring valuations closer to long-term averages,” Bajaj said, adding that this could improve comfort levels for foreign investors in 2026.

India’s Structural Strengths in Focus

Market participants point out that India’s appeal goes beyond cyclical factors. According to Kushal Rastogi, Founder & CEO, Knight FinTech, global investors are increasingly looking for stability, predictability and long-term growth amid rising geopolitical fragmentation.

“India stands out as a rare bright spot,” Rastogi said, citing strong macro fundamentals, policy continuity and structural reforms. He highlighted India’s position as the world’s fourth-largest economy by nominal GDP and the third-largest by purchasing power parity, underlining its scale and economic momentum.

Rastogi also emphasised the role of India’s digital public infrastructure, Aadhaar, UPI and India Stack, in transforming financial access and formalisation at population scale. “Smartphones and real-time payments have become ubiquitous, fundamentally reshaping consumption and financial behaviour,” he said.

Also read: Bharat Coking Coal's Rs 1,071 Crore IPO Fully Subscribed On Day 1

Supply Chains, Manufacturing and Capital Flows

As global supply chains diversify away from concentrated geographies, India is increasingly being viewed as a preferred manufacturing and technology hub. Reforms such as GIFT City, Rastogi noted, have created an offshore-like financial ecosystem within India, offering global investors regulatory clarity and smoother capital mobility.

“Recent currency depreciation has also made valuations more compelling, creating favourable entry points for long-term investors,” he added.

2026 Would Be A More Selective Return of Foreign Money

According to Jeet Mukesh Chandan, Group Managing Director, BizDateUp, foreign capital is likely to look at India more favourably in 2026 as macro fundamentals align with long-term growth visibility.

“India continues to be one of the fastest-growing major economies, with GDP growth trending above 7–8% and inflation remaining well within comfort levels,” Chandan said, adding that this growth-stability combination is particularly attractive to global investors.

While FPIs were net sellers through parts of 2025, Chandan said valuations are becoming more compelling, earnings visibility is improving and macro risks around India are moderating. He also pointed to early signs of renewed interest from global institutional investors in AI, fintech, manufacturing, climate-tech and digital infrastructure.

“As we move into 2026, foreign capital is likely to return in a more selective, quality-driven manner,” Chandan said, favouring markets like India where growth is backed by policy continuity, economic resilience and a deepening entrepreneurial ecosystem.

Experts caution that while 2026 could mark a turning point, the return of foreign capital is expected to be disciplined rather than euphoric. Still, with stabilising global liquidity, improving valuations and India’s structural strengths intact, the country remains well placed to attract sustained foreign inflows over the medium term.

Also read: Budget 2026: Emkay Notes 4 Red Flags In India's Insurance Sector