Foreign Investors Pulled $26.3 Billion From Emerging Markets in September, IIF Says, Blaming Fed Hike and Higher Yields

Since the Indian market's September rout, the picture has widened beyond one country. On Wednesday the Institute of International Finance (IIF) put a number on the global version: foreign investors pulled $26.3 billion out of emerging-market stocks and bonds in September.

It was the first monthly outflow since June. The IIF says a hawkish Federal Reserve drove it by pushing up U.S. yields and the dollar.

Where the money left

Equities took most of the hit. The IIF counted a $19.2 billion outflow from emerging-market stocks, driven by heavy foreign selling in South Korea.

That selling is not new. The IIF says foreign selling of Korean equities has run through most of 2026, and September's peak came after a 62% rise in the KOSPI this year. The retreat also coincided with a cooling in the AI-driven tech rally that had lifted several Asian markets, as investors locked in gains on richly valued chip and technology names.

Fixed income lost $7 billion. That is the first net outflow from emerging-market bonds since March, when the Middle East conflict roiled global markets.

Every region in the bond universe recorded outflows, though the asset class is still up $246 billion in foreign inflows for the year.

Equities look worse over the longer run. Year-to-date equity outflows stand at $113.9 billion, against $27.3 billion at the same point in 2025. Excluding China, the tally reaches $151.5 billion.

The Fed and the yield jump

The IIF points to the Fed under Kevin Warsh, which raised rates in September for the first time since 2023 and signaled inflation remains a concern. The decision pushed Treasury yields sharply higher and lifted the dollar.

"The pressure built in the second half of the month, as hard currency bond funds turned to outflows in the week of the FOMC decision and EM dollar credit spreads widened," the IIF said.

The 10-year Treasury yield climbed to 5.108%, its highest level since 2007, according to Breitbart. That move followed S&P Global's preliminary September survey, which showed U.S. manufacturing and services activity expanding at the fastest pace in more than five years. The composite index rose to 58.4 from 56.0 in August.

After the survey, futures-implied odds of an October Fed hike rose from 53% to 73%, according to Breitbart's market digest. CNN, citing the CME FedWatch tool, put the chance at 71%.

S&P Global economist Chris Williamson said U.S. business output grew at the fastest rate in over five years. Fed Governor Michael Barr said inflation, which remains above the 2% target, is the greater risk because growth is so solid.

Competing explanations for the rise in yields

Not everyone reads the yield surge the same way. Breitbart's analysis argues the move is not a verdict on Washington's debt. Its case is that the deficit did not change when the survey came out, and that investors simply learned the economy was stronger than expected and repriced rate expectations.

CNN points to energy instead. It ties higher inflation pressure to the war with Iran and the closure of the Strait of Hormuz, and says the two-year yield has risen from 3.48% at the start of the year to 4.93% this month. The IIF puts the weight on policy: a Warsh Fed projecting further hikes, a Bank of Japan at its highest policy rate since 1995, and tightening across advanced economies.

These explanations overlap, and the data released so far does not rank them. What the numbers show is that yields, the dollar and policy rates all moved in the same direction at once.

India's slice of the outflow

India felt the same pressure. Depository data cited by Newsbytes puts foreign portfolio investor (FPI) net selling of Indian equities in September at ₹35,860 crore. That followed inflows of ₹29,630 crore in August and ₹20,200 crore in July.

The Nifty 50 and Sensex each fell nearly 6% over the month.

Different trackers and cut-off dates produce different tallies. By September 21, Money Times reported FPI withdrawals of around ₹20,974 crore so far in the month, with healthcare drawing comparatively stronger foreign interest while financials, automobiles, oil and gas, and FMCG saw significant selling.

SEBI Chairman Tuhin Kanta Pandey has said the regulator has already eased FPI onboarding and is working with the RBI on more. These include faster digital registration, streamlined KYC, and the SWAGAT-FI route for trusted, lower-risk investors.

Pandey also acknowledged the limits of that effort. FPIs weigh net returns, he said, and India is "in a competitive situation." Newsbytes lists rising U.S. rates and bond yields, high crude prices and a weaker rupee as the pressures on India, a major oil importer.

What comes next

The IIF's forward view is blunt: a hawkish Warsh Fed, a tighter BoJ and broad advanced-economy tightening "raise the hurdle for EM carry into the fourth quarter."

The next test is the Fed's October meeting, where futures implied a 73% chance of another hike after the S&P survey, according to Breitbart. If that hike lands, the IIF's own warning suggests emerging-market flows will face continued pressure.