Foreign institutional investors have turned cautious on Indian equities amid global risk aversion and valuation concerns, but analysts say India's long-term growth story remains intact.Estimated Indian market correction over the periodForeign institutional investors (FIIs) withdrew approximately $5 billion from India-focused offshore funds and ETFs in the first quarter of 2026, according to Morningstar Investment Research. The outflows coincide with heightened global uncertainty, a depreciating rupee, and persistent discomfort around Indian equity valuations.ETMarkets.comHimanshu Srivastava, Associate Director of Manager Research at Morningstar, told ET Now that the retreat should not be read as a loss of faith in India. "Foreign investors are not disillusioned," he said. "They continue to believe in India's long-term growth story — but global risk aversion and valuation discomfort are real headwinds right now.""As long as India's structural long-term growth story remains intact, that is where we should be focusing. FIIs have moved out of Indian markets in the past — and they have always come back." says Srivastava.Total FII holdings fell sharply, from $826 billion at the end of December 2025 to $660 billion by March 2026. Of that roughly $166 billion drop, only $5 billion represents direct outflows. The remainder is largely attributed to a combination of currency depreciation and a 10–13% market correction, with currency weakness accounting for the larger share.MORE STORIES FOR YOU✕« Back to recommendation storiesI don't want to see these stories becauseThey are not relevant to meThey disrupt the reading flowOthersSUBMITA notable split has emerged between fund and ETF behaviour. While actively managed India-focused offshore funds bore the brunt of redemptions, ETFs have shown resilience — a sign that foreign investors are using them as a short-term tactical tool to maintain Indian market exposure without long-term commitment. Meanwhile, India's allocation in regionally diversified Asia-Pacific and global emerging market funds has also edged lower, though it remains dynamic and subject to rebalancing against MSCI benchmarks.Market timing matters far less than staying investedFor domestic investors, Srivastava's message was more straightforward: India is the only market available to them, and current conditions represent a reasonable entry point for long-term SIP investors. Market timing, he noted, matters far less than staying invested consistently over time.The key catalyst for FII return, analysts suggest, will be currency stabilisation. A sharply depreciating rupee erodes dollar-denominated returns even when local equity markets gain - making currency predictability as important as valuation or growth outlook for foreign capital allocation decisions.