The January Jolt: Why FIIs Are Leaving — And What Nifty’s P/E Is Quietly Signalling.

~Sumon Mukhopadhyay 

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Indian equities opened 2026 on a mildly shaky footing. While domestic investors continue to show resilience, persistent selling by Foreign Institutional Investors (FIIs) has unsettled short-term sentiment. FIIs have already withdrawn approximately ₹33,598 crore from Indian equities this month, contributing to a near 4% decline in the Nifty 50 since the start of January.

Yet markets rarely move in straight lines. Beneath the headline volatility, valuation metrics and domestic liquidity flows suggest a more nuanced picture — less panic, more recalibration.

The FII Exit: A Multi-Front Storm:

Foreign investors are not pressing the sell button randomly. Several overlapping pressures are influencing capital flows:

• Global Trade Frictions: Uncertainty surrounding the US administration’s evolving tariff posture — including the so-called “Greenland Tariff” discussions — has increased risk aversion across emerging markets. Delays in finalising large bilateral trade agreements, including with India, have further restrained foreign risk appetite.
• Currency Pressure: The Indian rupee slipping toward the ₹91–92 per dollar zone directly impacts dollar-denominated returns for global investors. A depreciating currency mechanically reduces realised gains, even if equity prices remain stable.
• Earnings Moderation: Early corporate results for Q3 FY26 have been mixed. Select IT services, discretionary consumption, and export-linked sectors have delivered softer growth guidance, limiting immediate valuation expansion.
• Higher Global Bond Yields: Elevated yields in US Treasuries and Japanese Government Bonds have revived the appeal of low-risk fixed income, pulling some capital away from equity risk.

Nifty Valuation in Historical Perspective: The P/E Reality and Where Today Fits:

Over the past two decades, India’s benchmark index has displayed a fairly consistent valuation cycle driven by liquidity, earnings growth, and global risk appetite. Despite the sell-off, the Nifty 50 continues to trade around a P/E multiple of roughly 22. Historically, the long-term average P/E of the Nifty has remained in the zone of approximately 19 to 20.

During periods of extreme stress and panic — such as the Global Financial Crisis in 2008 and the COVID crash in March 2020 — valuations compressed sharply, with the P/E slipping into the 14 to 15 range. Those phases reflected fear-driven liquidation rather than deterioration in India’s long-term growth trajectory.

On the opposite end, during liquidity-fuelled bull runs — notably in 2017 and again during the post-pandemic rally of 2021 — the Nifty traded at stretched valuations exceeding 25 to even 28 times earnings. Those phases were driven more by abundant global liquidity and speculative enthusiasm than by proportional earnings growth.

Against this historical backdrop, the current valuation near 22 places the market slightly above its long-term average but well below euphoric territory. In other words, the market is neither cheap nor dangerously expensive — it is settling into a zone of valuation discipline after years of liquidity excess— a classic consolidation zone.

This positioning also signals that future returns will depend far more on corporate earnings growth than on valuation expansion. Without a visible acceleration in profit growth through FY26–27, upside from multiple re-rating alone remains limited.

Incidentally, the NSE’s shift to consolidated earnings for index valuation has made today’s P/E structurally more conservative than older standalone-era readings, making historical comparisons more realistic and less inflated.

Metric	Current Level (Late Jan 2026)
Nifty 50 P/E	22.12
Price-to-Book (P/B)	3.49
Dividend Yield	1.38%

An important technical nuance: NSE now calculates index valuations using consolidated earnings rather than standalone profits. This captures subsidiary performance and provides a more realistic profitability picture for conglomerates and diversified groups.

The Silver Lining: Domestic Capital as the Shock Absorber:

While foreign flows remain cautious, Domestic Institutional Investors (DIIs) have emerged as the stabilising counterweight. DIIs have purchased approximately ₹17,900 crore during early January sessions, absorbing a meaningful portion of the foreign selling pressure.

This domestic liquidity — driven by SIP inflows, retirement funds, and insurance capital — is structurally reducing India’s dependence on volatile foreign money. For patient investors, such phases often sow the seeds for future accumulation opportunities, provided earnings momentum gradually improves.

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Data References:

• NSE India – Index Valuation Dashboard
• LiveMint & Economic Times – FII/DII Flow Reports (Jan 2026)
• Union Bank FX Weekly Commentary
• Global Bond Yield Trackers