Foreign institutional investors (FIIs) are staging a structural overhaul of their Indian equity portfolios by aggressively slashing their exposure to the country's multi-billion-dollar bluechip heavyweight stocks. Shareholding pattern data reveals that the top 10 stocks held by FIIs in March 2022, which once commanded a massive 40.9% of their entire India portfolio, saw that allocation nearly halved to just 21.3% by March 2026.The damage is spread across every name on that list, but the biggest casualties are the ones that once anchored most India portfolios of foreigners. HDFC and HDFC Bank together, the combined entity that was the single largest FII holding, saw their contribution collapse from 11.6% to 6.9%, a drop of 4.7 percentage points, shows data from ICICI Securities.In the last 4 years, FII holding in Reliance Industries (RIL) has fallen from 9.1% to 5.3%. Infosys shed 3.7 percentage points, dropping from 5.8% to a thin 2.1%. TCS went from 4.2% to 1.3%.Further down the list, the declines are smaller in absolute terms but no less telling. Asian Paints, once a consensus consumer bet, is now at just 0.4% of FII portfolios. Tech Mahindra sits at the same 0.4%. Hindustan Unilever (HUL), long considered defensive, has been cut to 0.8%.However, it is not a simple rotation story but a global capital reallocation trade where India is losing the argument to Taiwan and South Korea."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 and how India's weight in the MSCI EM Index has evolved," N. ArunaGiri, CEO of TrustLine Holdings told ET Markets.Also Read | Is your portfolio FII-proof? 7 stocks Jefferies says can defy the $53 billion foreign selloffFII ownership in Indian-listed equities has fallen to a 14-year low of around 14.7%, down from nearly 18% a few years ago. Simultaneously, India's weight in the MSCI Emerging Markets Index has dropped sharply from over 20% about two years ago to over 12% currently."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-based," ArunaGiri said. "The fall in FII ownership in blue-chip stocks appears to be less about a shift from large blue-chip stocks to broader markets within India, and more a consequence of a larger global allocation trade by foreign investors. This is a very important distinction to understand."This broader retreat is also visible in aggregate FII holding of Indian stocks, which has ebbed to approximately 15% currently, compared to approximately 20% a decade ago, according to ICICI Securities with the bulk of that retreat triggered post-2022, coinciding with the Russia-Ukraine conflict and the bottom formation of US tech stocks.Also Read | Red alert: 15 stocks most vulnerable to FII selling as DIIs refuse to step inThe currency drain that no one talks aboutThe headline Nifty returns look passable on the surface with roughly 35% in rupee terms between March 2022 and May 2026. But Vishad Turakhia, CEO of Equirus Securities, points out that after adjusting for rupee depreciation of 27–28% over the same period, cumulative dollar returns for FIIs compressed to low single digits per year.Contrast that with the S&P 500, which generated over 60% in dollar returns over the same period, powered by earnings resilience from the AI boom. US Treasury yields, meanwhile, moved into the 4–5% range by offering meaningful risk-free returns in dollars with zero emerging-market currency or valuation risk."Despite correction, Indian equities continue to trade at a premium to broader EM peers of around 20–21x forward P/E but offer earnings growth of only 10–12%, making India harder to justify for FIIs when currency depreciation is eroding dollar returns," Turakhia said.India's valuation premium over other emerging markets, which had once ballooned to nearly 100%, has now moderated to around 66%, according to ArunaGiri. But the compression has not yet triggered a wholesale return of flows.Sector-specific woundsIT majors Infosys, TCS, HCL Technologies, and Tech Mahindra combined have seen their collective FII portfolio share collapse from approximately 12.4% in March 2022 to just 4.7% in March 2026. The IT index has corrected 40% amid fears that AI rollouts will reduce enterprise IT spending. With OpenAI and Anthropic eyeing equity debuts this year and aggressively rolling out new products, the structural demand for Indian IT services faces a credible long-term threat.Banking is the other pressure point. HDFC Bank, the largest single-stock FII holding, has underperformed the broader market following its merger with HDFC Ltd, a hangover that has stretched longer than many investors anticipated, Turakhia noted. Its contribution to FII portfolios has nearly halved."FIIs are not exactly shunning Indian bluechips — they are rebalancing their portfolios," said Pranay Aggarwal, Director and CEO of Stoxkart. "Over the last four years, sectors like IT, private banks, NBFCs and consumption have seen valuation concerns, earnings moderation or stock-specific challenges. Many of these companies remain strong, but the risk-reward has become less attractive compared to newer growth pockets."Are the worst FII outflows behind us?Signs of exhaustion are already appearing. ArunaGiri points to positive foreign flows in recent trading sessions despite worsening geopolitical tensions, currency pressures, and volatile oil prices."The recent inflows should therefore not be interpreted as a full-fledged comeback by FIIs, but more as the beginning of a tactical re-entry trade," ArunaGiri concludes, "driven by improving relative valuations and signs that the worst of the selling pressure may already be behind."(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)