Why foreign investors are exiting Nifty giants to hunt in India’s small and midcap market

Even as foreign institutional investors (FIIs) have slashed their concentration in India’s marquee blue-chip stocks to nearly half of what it was four years ago, they have quietly expanded the number of Indian stocks they hold stakes in from roughly 900 to 1,300. Foreign investors are piling into capital goods, manufacturing, defence, healthcare and new-age tech, sectors where the action is predominantly in mid- and small-cap stocks.

The aggregate FPI holding of Indian stocks has ebbed to roughly 15%, down from 20% a decade ago. But within that retreat lies a structural repositioning as the top 10 Nifty stocks, which once accounted for 40.9% of all FPI holdings in India, now command just 21.3%. The money is moving down the market-cap ladder, chasing growth in corners of the Indian economy that global investors once largely ignored.

“FIIs are not exactly shunning Indian blue-chips; they are rebalancing their portfolios,” said Pranay Aggarwal, Director and CEO of Stoxkart. “The rise in FII ownership from around 900 stocks to 1,300 stocks shows that foreigners are expanding their India universe. It does indicate growing interest in select small and midcaps, but not blindly as FIIs are focusing on companies with stronger earnings growth, better governance, liquidity and scalability.”

The supply of investable stocks has itself grown dramatically. India’s IPO boom between 2023 and 2025 produced 259 main-board listings, including a wave of new-age tech companies like Ather Energy, Groww, Pine Labs, PhysicsWallah, Meesho and others giving foreign investors “a richer, deeper menu that simply did not exist in 2022,” according to Vishad Turakhia, CEO of Equirus Securities.

Separately, PLI incentives and the China-plus-one manufacturing shift have created an entirely new cohort of mid-cap industrial winners in electronics, capital goods, specialty chemicals and power equipment which had little listed representation four years ago.

Aggarwal points to capital goods, manufacturing, healthcare, defence, consumer discretionary and financial services as the new hunting grounds for foreign money.
“To understand the sharp decline in FII ownership in large blue-chip stocks, one first needs to look at the broader context of overall foreign institutional ownership in India,” said N. ArunaGiri, CEO of TrustLine Holdings. “FII ownership in Indian-listed equities has fallen to a fourteen-year low of around 14.7%, compared to nearly 18% levels seen a few years ago. At the same time, India’s weight in the MSCI Emerging Markets Index has sharply declined from over 20% about two years ago to over 12% currently.”ArunaGiri argues the retreat from blue-chips is less about a deliberate pivot to broader Indian markets and more about a larger global reallocation trade. “What has effectively played out is a reallocation of FII capital away from India towards markets such as Taiwan and Korea, where compelling AI-led investment narratives have emerged — especially semiconductor chips. The changing weights within the MSCI EM Index reflect this trend quite clearly,” he said.

Turakhia explains the macro math by pointing out that while the Nifty 50 delivered roughly 35% returns in rupee terms between March 2022 and May 2026, the rupee’s 27-28% depreciation over the same period eviscerated those gains for dollar-based investors. “After adjusting for the rupee’s move, cumulative USD returns for FPIs compressed to low-single digits per year, materially underperforming US equities and even US fixed-income assets,” Turakhia said. Over the same period, the S&P 500 generated dollar returns exceeding 60%, buoyed by AI-driven earnings resilience, while US Treasury yields moved into the 4-5% range — offering meaningful risk-free dollar returns with no emerging market exposure.

At the same time, sector-specific headwinds compounded the pain in India’s largest stocks. IT — a major Nifty constituent — has corrected 40% amid fears that AI adoption will cannibalize enterprise IT spending. “With Anthropic and OpenAI looking for equity debuts this year, they are aggressively rolling out new products which are likely to impact demand for Indian IT services,” Turakhia noted. Banking, the other heavyweight sector, has also struggled, with HDFC Bank underperforming the broader market in the wake of its merger with HDFC Ltd.

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