10/06/26, Funds Allocation Fall

Foreign institutional investors' weight in India's two largest sectoral bets -- financials and information technology -- has sharply fallen, as sustained outflows since the start of 2026 and a broad market correction eroded both allocations and absolute holdings.

FII allocation to the IT sector stood at 5.6 percent of total equity holdings in May, the lowest level in NSDL data available since 2012. The allocation has fallen 185 basis points since the start of 2026 and nearly 500 basis points since the beginning of 2025. In value terms, FIIs held around $40 billion worth of IT stocks during the month, against roughly $60 billion at the start of 2026 and $81 billion at the beginning of 2025.

Meanwhile, FII exposure to financial stocks fell to a 16-month low of 29.5 percent in May, down 285 basis points from the start of 2026. In absolute terms, holdings stood at around $210 billion during the month, compared with $250 billion at the beginning of 2026.

Together, IT and financial stocks accounted for outflows of nearly $3 billion and $12.2 billion, respectively, according to fortnightly data on NSDL, so far in 2026 -- representing nearly 55 percent of the total FII equity outflow of $28 billion.

Financial stocks have faced headwinds from rising global inflation and surging crude oil prices, which have stoked broader domestic economic concerns. IT stocks, meanwhile, have remained under pressure due to a convergence of lowered revenue growth forecasts, structural disruption from artificial intelligence threatening traditional outsourcing models, and weak client spending -- particularly in the United States and Europe.

Market experts note that financial services and IT services carry a significantly higher weight in benchmark indices, reflecting both their market capitalisation and substantial FII ownership. As a result, broad-based risk reduction or basket selling by FIIs tends to disproportionately impact these sectors, resulting in higher reported outflows relative to the rest of the market.

Nirav Karkera, Fund Manager at Fisdom PMS and Head of Research, said that in financial services, a large share of the elevated selling is attributable to the sector's higher representation in FII portfolios through both strategic allocations and passive, index-linked holdings.

In IT services, he added, the sector has been undergoing a sustained derating cycle amid a challenging demand environment driven by a global economic slowdown, compounded by persistent geopolitical uncertainties and growing concerns over the impact of AI-led disruptions on future earnings and business models.

At the end of May, FII total equity assets stood at $710 billion, down 14 percent from $826 billion at the end of December 2025 and $831.49 billion at the end of December 2024.

Report by Ravindra Sonavane

source: Network18