Since the September 2024 market peak, FIIs have remained persistent net sellers, with cumulative outflows of $57 billion, including around $27 billion in CY26YTD. After four straight months of heavy selling between March and June 2026, FIIs finally turned net buyers in July, investing $2.5 billion, their highest monthly inflow in the past 13 months.
But one sector has remained firmly out of favour. FMCG continued to see FII outflows every month this year, with July seeing an outflow of Rs 1,103, taking the total CY26 outflow to Rs 28,276 crore, according to NSDL data. In fact, FMCG stocks have faced sustained foreign selling for the past 12 months, with FIIs pulling money out every month and taking the cumulative selling to $5.25 billion.
The impact has been visible in stock performance. Hindustan Unilever (HUL) shares have fallen 18% in one year, while ITC is down 34% and Dabur has declined 20%. Tata Consumer is down 9% this year. The outliers have been Nestle, which is up 35% in one year, and Britannia, which has gained a marginal 4%.
But what’s troubling FMCG stocks?
“FMCG has been a defensive allocation sector for FII’s. Growth here is in single digit and valuations are high. In the past 3-5 years wherever growth has slowed down high multiples have gotten derated”, Aman Chowhan, Head of Equities - Alternates, Abakkus Investment Managers told ETMarkets. “This underperformance can continue in FMCG and this could be their worry. Also near term there can be a negative impact due to deficient monsoons so far,” he added.
Historically, investors have been willing to pay a premium for FMCG companies because of their predictable earnings, pricing power and resilient demand. That premium, however, is becoming harder to justify as volume growth moderates, input costs rise and earnings growth becomes increasingly dependent on pricing rather than volumes.
“I don't think investors are questioning the quality of the businesses. The bigger question is how much they are willing to pay for that quality when near-term earnings growth is less certain,” Vinit Bolinjkar, Head of Research at Ventura said in a conversation with ETMarkets.
Amit Agrawal, Head of Fundamental Research at Kotak Securities, said the continuous monthly FII selling in the Nifty FMCG index throughout 2026 stems from stretched FMCG valuations, raw material inflation and gross margin squeeze, sluggish rural recovery and urban down-trading, market-share erosion through quick commerce competition, and sector rotation into value and commodity equities.
The first phase of the sector's underperformance can reasonably be seen as a valuation and relative-growth rotation. Staples were priced for predictability, while other sectors offered stronger earnings momentum. However, continued selling even after the sector's de-rating suggests that the debate is increasingly shifting towards earnings visibility.
“Consumer Staples at roughly 46.3x 12-month forward earnings versus a 10-year average of 50.4x around an 8% discount to the historical average. That weakens the argument that foreigners are selling simply because FMCG is still above its own history,” Tanvi Kanchan, Associate Director Anand Rathi Share and Stock Brokers said.
How is FY27 shaping out?
Analysts remain cautious. While the Q1 earnings season has come in better than expected on both revenue and margins, most of the companies that outperformed have cited inventory gains as the key reason for the improvement in margins. If crude stays higher for longer, this benefit will start to wane from Q2 onwards.
“Higher crude and crude-linked input costs, particularly packaging and logistics, will put pressure on margins. Companies are likely to respond through calibrated price increases, premiumisation and cost efficiencies. However, there is a limit to how much of the inflation can be passed through before it starts affecting consumption, particularly in mass-market categories,” Bolinjkar added.
Crisil expects organised FMCG revenue growth of around 8–10% in FY27, but volume growth of only 2–3%, with margins potentially coming under pressure. This points to near-term growth remaining more price-led than volume-led.
That said, Bolinjkar said he would not extrapolate the current pressure too aggressively. If West Asia tensions ease and commodity prices normalise, gross margins could see a relatively quick recovery. The festive period will also be an important test of whether consumers are absorbing price increases without a meaningful deterioration in volumes.
Will FIIs return anytime soon?
Experts say three things will be closely watched. First, a meaningful improvement in rural and urban consumption, with volume growth moving back towards mid-single digits. Second, moderation in crude and other key input costs, which would allow companies to rebuild margins instead of continually relying on price increases. And third, a more attractive valuation entry point accompanied by actual earnings upgrades.
On the broader sectoral outlook, traditional FMCG stocks remain unattractive at current valuations, according to Deepak Shenoy, CEO at Capitalmind AMC. Shenoy said the sector is a “complete avoid” for his investment strategy despite strong results from companies such as Marico, Colgate and Nestlé. He cautioned that elevated valuations could limit returns even if companies continue to deliver robust earnings.
Shenoy said, “It's a completely avoid industry for us. But, you know, to buy stocks at 75 times PE multiple, I don't know how much return you will get even if the sector continues to perform well.”
“Once FMCG companies start to pass on higher input prices there will be an positive impact on value growth. Companies which are able to report double digit growth can see investor interest coming back,” Chowhan said.
Nifty FMCG’s seven-month streak of foreign selling should not be interpreted as evidence that Indian staples consumption has broken down. The stronger interpretation is that a traditionally defensive sector is facing an unusual combination of normalising volumes, elevated commodity-linked costs and uncertain near-term margin conversion, Kanchan added.
Rural demand remains ahead of urban demand, but the gap has narrowed sharply. At the same time, Q1 FY27 company results show that leading businesses can still deliver healthy underlying volumes. The sector has also de-rated, meaning valuation alone is becoming a less complete explanation for continued FPI selling.
The next decisive signal is likely to come from earnings. If commodity inflation stabilises, volume growth remains resilient and gross margins begin recovering, FY27/FY28 EPS revisions should turn upward. That combination, rather than simply a cheaper index, is likely to provide the strongest trigger for renewed foreign allocation to Nifty FMCG.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
