By Ankit Mandholia
The withdrawal of foreign portfolio investors (FPIs) from Indian markets is driven by a complex interplay of global economic trends, geopolitical uncertainties, monetary policies, and domestic factors. Since sustained outflows could pose challenges to market stability, it is important to ensure that there is macroeconomic stability to enhance the competitiveness of Indian markets, explains Ankit Mandholia
Is this part of a broader emerging markets sell-off?
While FPIs have been reducing their investments in India, this behaviour aligns with a broader trend of withdrawing from emerging markets. In 2025 so far, FPIs have sold Indian equities worth Rs 1.5 lakh crore, contributing to a 6% decline in the Nifty index year-to-date. This suggests that global factors are prompting investors to pull back from riskier assets. However, India’s relatively high market valuations and concerns over corporate earnings have made it more susceptible to these outflows.
Is India losing out to China?
Despite economic challenges in China, some FPIs are increasing their exposure there due to attractive valuations and government stimulus measures. In contrast, India’s markets have experienced significant rallies in recent years, leading to higher valuations. This disparity has prompted FPIs to rebalance their portfolios for better near-term returns.
Also, China’s advancements in AI, technology (semiconductor chips, robotics, EVs, batteries) and green energy has made it attractive for tech-focused FPIs. However, the recent FPI moves reflect a more tactical reallocation rather than a long-term shift from India.
US market more appealing
The US Federal Reserve’s decision to maintain elevated interest rates has made US assets more appealing to investors, leading to a stronger dollar. This has resulted in capital outflows from emerging markets, including India. The stronger dollar also makes investments in emerging markets less attractive due to potential currency depreciation.
In addition, the Russia-Ukraine conflict and growing unrest in the Middle East have heightened global uncertainty and have led to FPI outflows from markets perceived as vulnerable to external shocks, including India.
Also, India’s reliance on energy imports makes it susceptible to fluctuations in global oil prices.
US tariff policies
The announcement of reciprocal US tariffs on Indian exports has raised concerns about India’s trade prospects and economic growth. These trade barriers can negatively impact export-driven sectors, leading FPIs to reassess their investments in the Indian market.
The broader protectionist policies adopted by the US administration have led FPIs to consider reallocating investments to countries with stronger trade ties to the US. This shift in focus can result in reduced investments in India, especially if trade tensions escalate and affect India’s export sectors.
Is this purely liquidity driven?
Amidst modernisation in corporate earnings with Nifty50 delivering 4% PAT growth in 9MFY25, i.e., single-digit earnings growth for the third consecutive quarter and a decline in India’s GDP growth in 2024 has also had a dampening impact. Further, liquidity-driven factors such as global monetary tightening and higher returns in developed markets, are outweighing domestic growth prospects in investment decisions.
Are Indian debt markets in favour?
Indian bond yields have become increasingly attractive in comparison to those in developed markets, as the RBI has kept interest rates relatively high. With attractive bond yields, some FPIs are shifting their focus from equities to debt markets in India. Shifting some funds from equities to fixed-income instruments like Indian government and corporate bonds is a common strategy to reduce portfolio risk.
Is a sharper market correction likely?
Domestic Institutional Investors (DIIs) and retail investors have been stepping in to absorb FII selling, injecting around Rs 1.8 lakh crore into equities in 2025. However, if FII outflows persist, there is a risk that domestic investors may not be able to sustain this support, potentially leading to increased market volatility and sharper corrections.
Sectors with the worst outflows
In January 2025, the BFSI and IT sectors witnessed the highest outflows of $2.8 billion and $747 million, respectively. Oil & gas and automobiles also remained under pressure, marking their fifth and sixth consecutive months of net outflows, respectively. Conversely, chemicals, media, and telecom have seen marginal FPI inflows.
The writer is head – Equity and Derivatives, Wealth Management, Motilal Oswal Financial Services.
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