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In this report, we analyze sector-wise FII flows in the Indian equity market during Oct’26 and CY26YTD, and assess foreign investors’ broader sectoral positioning.

* Indian equities rebounded from their lows even as most global markets witnessed a sell-off in Oct’26, delivering negative returns amid rising concerns over interest rate hikes and growing questions about whether investments in AI infrastructure and capex had run too far ahead of potential returns. Elevated bond yields, higher crude oil prices, and heightened volatility further dampened global risk sentiment, triggering capital outflows from AI- and technology-heavy markets and sharper market declines. Markets also adopted a risk-off stance in Oct’26 amid uncertainty surrounding the outcome of the US midterm elections, prompting investors to pare their exposure to global equities.

* Against this backdrop of persistent headwinds, FII outflows continued in Oct’26 following the sharp sell-off in Sep’26, with net outflows amounting to USD2.2b during the month. However, FII activity witnessed a strong recovery in the second half of Oct’26. In contrast, DIIs maintained their strong buying momentum, recording net inflows of USD6.3b during the month.

FMCG and Financials drive FII outflows; Technology sees strong inflows

* FIIs sold USD2.2b worth of Indian equities in Oct’26, lower than the outflows recorded in Sep’26. In contrast, DIIs invested USD6.3b, extending their strong buying momentum for the 39th consecutive month.

* FIIs remained most bearish on FMCG (-USD 1.0b), Financial Services (-USD1.0b), and Automobiles (-USD0.8b). In contrast, they were most bullish on Technology (+USD1.4b) and Telecom (+USD0.7b) during the month.

* In Oct’26, 14 of the 20 sectors saw net FII outflows vs. 14 sectors in CY26YTD.

CY26YTD: Financials continue to witness the sharpest FII outflows

* In CY26YTD, FIIs have sold a record ~USD30.4b worth of Indian equities. Financial Services (-USD13.2b), Automobiles (-USD4.9b), and FMCG(-USD4.5b) witnessed the sharpest FII outflows, while Services (+USD1.4b), Metals (+USD1.3b), Capital Goods, (+USD1.1b) attracted the highest inflows.

* In CY26YTD, Services (+USD1.4b) emerged as the most preferred sector among FIIs, while Financials (-USD13.2b) remained the least preferred. This marked a clear shift from CY25, when Telecom (+USD 5.5b) was the most preferred sector and Technology (-USD8.6b) remained the least preferred.

* Notably, FMCG (-USD4.5b) and O&G (-USD4.4b) have seen FII outflows in nearly every month of CY26YTD. Conversely, Technology and Telecom recorded a sharp uptick in FII inflows.

FII volatility, a key overhang for Indian markets, appears to be easing

* Given India's healthy macroeconomic fundamentals, strong corporate earnings, a meaningful correction in valuations from their 2024 peak levels, and robust domestic liquidity, any moderation in the global AI trade could encourage a stronger and more sustained revival in FII interest in relatively underperforming EMs such as India. Easing FII selling in large-cap-heavy sectors also supported the relative outperformance of large caps over SMIDs during the month.

* Continued improvement in FII sentiment, coupled with easing geopolitical challenges, could help offset the headwinds that have weighed on Indian markets over the past two years and lay the foundation for a sustained market rally.

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