Can Budget stop $23 billion FII exodus? Here's what stock market investors are betting on

Massive FPI Withdrawals Shake Indian Markets

Foreign portfolio investors, often called FPIs or FIIs, have been pulling out huge sums from Indian equities, totaling around $23 billion since the start of 2025, with an additional $4 billion gone in January 2026 alone. This steady outflow has put significant pressure on stock benchmarks like the Nifty 50, which saw its weakest January performance in over a decade, dropping more than 3 percent. The selling has left FPI holdings in Indian equities at a 15-year low, raising alarms among domestic players who worry about broader market stability.

Several factors are driving this capital flight. Global uncertainties, including elevated US bond yields offering better risk-free returns, have made Indian stocks less attractive. The Indian rupee's depreciation adds to the pain, eroding post-tax returns for overseas investors. Trade tensions and policy worries, like retroactive tax changes, have further dented confidence. Even as domestic institutional investors step in to buy the dip, absorbing much of the selling, the market remains volatile, with heavy outflows continuing into early 2026.

Union Budget 2026: A Potential Turning Point

All eyes are now on Finance Minister Nirmala Sitharaman's Union Budget 2026, expected to deliver measures that could halt this exodus. Investors are betting on targeted tax reliefs for FPIs to make India a more appealing destination. The government is reportedly considering tweaks to address key irritants, such as the punitive fund-level taxation that leads to double taxation for investors from countries without tax treaties. Such reforms could act as a tailwind for equities, boosting cash market flows and signaling long-term commitment to foreign capital.

Experts see this budget as a crucial juncture. Steps to attract durable foreign direct investment and portfolio flows are high on the wishlist, alongside reforms in FDI policies. While a capex push in sectors like railways, defense, and consumption might provide some uplift, the real game-changer could be a stable, transparent tax regime. Market watchers note that without addressing structural issues, like policy unpredictability highlighted by recent court rulings on back taxes, the outflows might persist. Domestic buyers have been a silver lining, investing heavily to counter FPI sales, but sustained foreign inflows are vital for growth.

"This Budget comes at a very crucial juncture as far as markets are concerned. The most important area to watch will be the steps the Finance Minister takes to attract durable FDI and FPI flows into the economy," said Nimesh Chandan, Chief Investment Officer at Bajaj Finserv Asset Management Limited.

What Investors Are Hoping For and Challenges Ahead

Stock market participants are optimistic yet cautious. They hope for reductions in long-term capital gains tax and clearer rules to rebuild trust. Corporate earnings growth and balanced fiscal measures could also help, but global headwinds like US tariff threats and weak quarterly results in IT, auto, and financial sectors complicate the picture. The balance of payments deficit has widened, funded by dipping forex reserves, underscoring the urgency.

While the budget might not fully reverse the $23 billion outflow overnight, targeted incentives could slow the bleed and set the stage for recovery. Investors are watching closely, balancing hopes against realities like currency weakness and international sentiment. A proactive approach here could reaffirm India's status as a top investment hub. In summary, the $23 billion FPI exodus stems from tax hurdles, global risks, and local challenges, but Union Budget 2026 offers a shot at reversal through reforms and reliefs, with markets betting on positive surprises to lure back foreign money.