Every few weeks, tensions in the Strait of Hormuz return to the centre of global markets. It’s the undying zombie, driving fears over oil prices and inflation.

For an oil-importing economy like India, these two factors, oil and inflation, are influencing how foreign portfolio investors (FPIs) position their portfolios. Over the first six volatile months of 2026, FPIs sold Rs 2.7 lakh crore in Indian equities.

Financials and IT accounted for over half of these outflows as index heavyweights took the hit from risk-averse investors and rebalancing by MSCI (provider of financial benchmarks). Volatility in crude oil prices have also weighed on oil & gas stocks, and FPIs cut exposure to consumer-facing sectors amid a softer spending outlook and higher input costs.

Capital goods and metals were among the few positive sectors, helped by government spending and manufacturing-led investment.

Abhay Laijawala, chief investment officer at Lighthouse Canton, said, “The worst of the FPI selling is over and outflows will reduce significantly.” He added that buying in large banks could power the markets higher.

In this edition of Chart of the Week, we analyse where foreign investors sold the most, and where they continued to invest.

Global risks drive selling in market leaders

Most sectors saw a brief turnaround in FPI flows in February as a trade deal with the US boosted confidence in the rupee. That optimism faded as crude prices climbed and inflation fears rose.

Oil & gas stocks saw FPI outflows of Rs 28,646 crore during the first six months of this year as the war fuelled volatility in crude oil prices, clouding companies’ earnings outlook.

During periods of economic uncertainty, FPIs usually cut exposure to index heavyweights such as financials and IT since they’re the easiest stocks to sell, because of their high liquidity.

Financials saw the highest outflows, with over Rs 1.1 lakh crore leaving the sector, while IT recorded outflows of Rs 34,247 crore between January and June. Financials also saw passive selling after MSCI reduced India's weight in its Emerging Market Index from 13.4% in January to around 10.9% in May, forcing index-tracking funds to cut exposure to large banks.

The IT sector was already grappling with weaker US demand as clients accelerated AI adoption, reducing spending on traditional IT services. With about 60% of revenue coming from the US, the conflict only exacerbated investors’ concerns.

The Q1FY27 earnings season has offered some relief, with the Nifty IT rising over 4% in the past week after TCS posted better-than-expected results.

Healthcare is seen as a defensive sector, but it wasn't immune this time. FPIs sold Rs 20,938 crore during the first half of 2026. New launches such as semaglutide should support revenue growth. However, Goldman Sachs expects profitability to remain under pressure, particularly for companies with significant exposure to the US generics market. Companies such as Dr Reddy’s, Zydus Life, Cipla and Sun Pharma also lost the benefit of high-margin generic Revlimid sales as competition intensified. Pricing weakened, while the product mix shifted towards lower-margin products.

By the second half of June, financials drew their biggest fortnightly inflows in 14 months. FPIs responded to the RBI’s measures, which helped banks raise overseas funds more cheaply and allowed them to lend to NRIs against foreign currency deposits. Citi Research said these changes could improve banks' margins by reducing funding costs.

Weak demand weighs on domestic sectors

The RBI's consumer confidence survey in May suggests households are becoming more cautious. Urban households became less willing to spend on discretionary items, while rural households saw a sharper decline in non-essential spending plans.

Urban future expectations (which measure long-term consumer optimism) fell to 118.7, the lowest since September 2023. Rural expectations dropped sharply to 119.3 from 129.3 in January over concerns of an El Niño-led hit to rural incomes. A reading above the RBI's neutral level of 100 still signals that households expect conditions to improve over the next year.

FMCG, consumer services, and consumer durables together saw net outflows of Rs 51,679 crore during the first half of 2026. Higher fuel and food prices squeezed household budgets, while expensive valuations made the sectors less attractive to FPIs. 

Automakers faced higher input and freight costs due to disruptions in key shipping routes. The sector recorded net outflows of Rs 30,885 crore during the first half of this year as companies faced a difficult choice: absorb rising costs or pass them on to customers. The sector is also expected to see slower growth in FY27 after tax reforms helped drive a strong performance in the previous fiscal year.

FPIs also sold Rs 9,668 crore worth of construction materials stocks, while realty saw outflows of Rs 8,337 crore during the first six months of 2026. Developers estimated that construction costs rose by as much as 25% since hostilities escalated in West Asia. Shipping companies also rerouted vessels via the Cape of Good Hope, increasing transit times and raising freight costs by Rs 1.5-3.5 lakh per container. 

Telecom stocks saw outflows of Rs 17,423 crore as investors awaited another round of tariff hikes after the industry's last broad price increase in July 2024. Delayed tariff action curbed expectations of stronger earnings.

FPIs back India's investment cycle

FPIs have been selective with their inflows, favouring sectors linked to India's investment cycle. Capital goods and metals together saw inflows of nearly Rs 34,000 crore during the first half of this year. The services sector, comprising logistics, transport infrastructure and commercial services, drew Rs 6,090 crore. Power attracted modest inflows of Rs 965 crore.

CRISIL expects revenue in India’s capital goods industry to grow by 12-14%, driven by government spending and higher investment in power and infrastructure. India is likely to see higher power demand as households increasingly use air conditioners and cooling appliances amid rising temperatures and heatwave conditions. JM Financial said coal-based plants were running at nearly full capacity to meet this demand.

Indian metal companies largely follow global metal prices. Expectations of tighter global supplies and fresh stimulus measures in China boosted metal prices, while the Indian government's anti-dumping duties added to positive sentiment.

During June, however, both capital goods and metals saw profit booking after consistent inflows. 

Even so, broader FPI sentiment appears to have improved in recent weeks, with FPIs turning net buyers so far in July after four consecutive months of selling. The government's decision to scrap capital gains tax for FPIs and remove the 20% tax on interest income has improved their post-tax returns. That, coupled with a stronger rupee, could help sustain foreign inflows if global conditions don’t deteriorate.