Why international buyers are exiting Nifty giants to hunt in India’s small and midcap market

At the same time as international institutional buyers (FIIs) have slashed their focus in India’s marquee blue-chip shares to almost half of what it was 4 years in the past, they’ve quietly expanded the variety of Indian shares they maintain stakes in from roughly 900 to 1,300. International buyers are piling into capital items, manufacturing, defence, healthcare and new-age tech, sectors the place the motion is predominantly in mid- and small-cap shares.

The combination FPI holding of Indian shares has ebbed to roughly 15%, down from 20% a decade in the past. However inside that retreat lies a structural repositioning as the highest 10 Nifty shares, which as soon as accounted for 40.9% of all FPI holdings in India, now command simply 21.3%. The cash is transferring down the market-cap ladder, chasing development in corners of the Indian economic system that world buyers as soon as largely ignored.

“FIIs should not precisely shunning Indian blue-chips; they’re rebalancing their portfolios,” stated Pranay Aggarwal, Director and CEO of Stoxkart. “The rise in FII possession from round 900 shares to 1,300 shares exhibits that foreigners are increasing their India universe. It does point out rising curiosity in choose small and midcaps, however not blindly as FIIs are specializing in firms with stronger earnings development, higher governance, liquidity and scalability.”

The provision of investable shares has itself grown dramatically. India’s IPO increase between 2023 and 2025 produced 259 main-board listings, together with a wave of new-age tech firms like Ather Vitality, Groww, Pine Labs, PhysicsWallah, Meesho and others giving international buyers “a richer, deeper menu that merely didn’t exist in 2022,” based on Vishad Turakhia, CEO of Equirus Securities.

Individually, PLI incentives and the China-plus-one manufacturing shift have created a completely new cohort of mid-cap industrial winners in electronics, capital items, specialty chemical compounds and energy tools which had little listed illustration 4 years in the past.

Aggarwal factors to capital items, manufacturing, healthcare, defence, shopper discretionary and monetary providers as the brand new searching grounds for international cash.

“To grasp the sharp decline in FII possession in massive blue-chip shares, one first wants to have a look at the broader context of total international institutional possession in India,” stated N. ArunaGiri, CEO of TrustLine Holdings. “FII possession in Indian-listed equities has fallen to a fourteen-year low of round 14.7%, in comparison with almost 18% ranges seen just a few years in the past. On the similar time, India’s weight within the MSCI Rising Markets Index has sharply declined from over 20% about two years in the past to over 12% at present.”ArunaGiri argues the retreat from blue-chips is much less a couple of deliberate pivot to broader Indian markets and extra a couple of bigger world reallocation commerce. “What has successfully performed out is a reallocation of FII capital away from India in direction of markets resembling Taiwan and Korea, the place compelling AI-led funding narratives have emerged — particularly semiconductor chips. The altering weights throughout the MSCI EM Index replicate this pattern fairly clearly,” he stated.

Turakhia explains the macro math by mentioning that whereas the Nifty 50 delivered roughly 35% returns in rupee phrases between March 2022 and Might 2026, the rupee’s 27-28% depreciation over the identical interval eviscerated these features for dollar-based buyers. “After adjusting for the rupee’s transfer, cumulative USD returns for FPIs compressed to low-single digits per yr, materially underperforming US equities and even US fixed-income belongings,” Turakhia stated. Over the identical interval, the S&P 500 generated greenback returns exceeding 60%, buoyed by AI-driven earnings resilience, whereas US Treasury yields moved into the 4-5% vary — providing significant risk-free greenback returns with no rising market publicity.

On the similar time, sector-specific headwinds compounded the ache in India’s largest shares. IT — a serious Nifty constituent — has corrected 40% amid fears that AI adoption will cannibalize enterprise IT spending. “With Anthropic and OpenAI on the lookout for fairness debuts this yr, they’re aggressively rolling out new merchandise that are more likely to affect demand for Indian IT providers,” Turakhia famous. Banking, the opposite heavyweight sector, has additionally struggled, with HDFC Financial institution underperforming the broader market within the wake of its merger with HDFC Ltd.

(Disclaimer: Suggestions, options, views and opinions given by the specialists are their very own. These don’t characterize the views of The Financial Occasions)