The markets are hitting fresh life-time highs, the GDP has rocketed to 6-quarter highs above the key 8% mark but FII selling continues. Just about nothing seems to change the direction for the overall FII flows. December has started with FIIs net selling equities worth Rs 1,171 crore. The foreign investors closed November as net sellers in equity, as well. This is the fifth consecutive month when FIIs have been net sellers. With this the total outflows in 2025 is well over Rs 2.96 lakh crore.
Outlining the key factors that have been responsible, market veteran Ajay Bagga said, “FPIs remain 85% net short in the Indian futures markets . In the cash market, they remain net sellers. The reasons are largely five-fold. The tax rules have been made stringent for investment by FPI. This has proved the proverbial last straw for FPIs, making the Indian markets overvalued, underleveraged on earnings growth momentum, with no AI plays, with a declining currency and an unfavourable tax regime. That in a nutshell makes for an unattractive market.”
Here are 5 reasons that FIIs are apprehensive about
Several factors are seen as potential catalysts triggering the continuing outflow by FIIs –
#1 Valuation of Indian markets
The valuations of Indian markets continue to be relatively higher than most of its EM peers despite the correction that was seen earlier in the year. Though the valuation of large caps have moderated significantly from their post-Covid highs, they are still above their historical averages. In the broader market, the small cap valuations too remain stretched. The price-to-earnings ratio is also above the long-term average. Many experts believe the valuations of the Indian equities, especially compared to peers make them vulnerable to reversals and also could be instrumental in FIIs .
#2 Capex muted
The muted capex spend is another cause for concern across investment circles. The Central government’s capex contracted in October by around 28% YoY. At the same time, the current expenditure increased sequentially due to higher interest payments, though they were lower than last year. The direct taxes, meanwhile, declined sequentially on lower income tax and corporate tax collections. Given the fact that GST collections contracted following rate reductions, Goldman Sachs expects “the Central Government to meet its fiscal deficit target of 4.4% of GDP for FY26 by reducing expenditure (likely capex), to offset potential income tax and GST shortfall.”
#3 Earnings growth momentum
The other key concern is the muted earnings picture. Contrary to expectations of an uplift in Q2, the earnings remained subdued. Only 17% firms saw earnings upgrade and the upgrade-to-downgrade ratio skewed toward downgrade, as per most brokerage reports. Most brokerages estimate Nifty’s FY26 EPS growth to be subdued with chances of a stronger rebound in FY27. The macro tailwinds, coupled with consumption recovery and rural demand normalisation, provide the ideal setup for a favourable base that is expected to support earnings going forward. The expectation is that of an earnings pickup in the subsequent financial years – FY27 and FY28. However, most believe that Q3-Q4FY26 earnings are likely to be crucial in determining durability of this earnings trajectory
#4 Rupee at fresh lows
The rupee slipped to record lows of 89.54/$ impacted by strong market demand for the dollar and the uncertainty with regard to the US-India trade talks. The rupee Vs US dollar rate is expected to remain under pressure, as analysts believe that the underlying imbalance between demand and supply for the US dollar is likely to persist. The Dollar Index too has been hovering well over the 99 mark. In fact, the Index has gained close to 2% in the last 3 months. This too has been weighing on sentiment.
#5 Indo-US trade uncertainty
The last but not the least important of concerns is the ongoing India-US trade talks. As per the most recent official statement. On November 28, India’s Commerce Secretary Rajesh Agrawal said India is “hopeful of reaching a framework trade deal with the US this year,” and is expected to address the tariff issue to the benefit of Indian exporters.
Talks between India and US have been underway for a long time, but no conclusive agreement has been reached thus far.
Most analysts believe that for a definitive turn in the FII sentiment, the earnings trajectory and valuations are the key monitorables. This, coupled with the dollar’s growing strength, has weighed on the relative charm of the Indian equities, especially in comparison to other EM peers.