FII selling is gaining momentum in July. Foreign institutional investors net sold Rs 3,548 crore worth of equities on July 22. With this, FIIs have net sold equities worth Rs 22,185 crore so far in July. At the current rate, July is set to see the third highest monthly outflows in 2025 after January and February. Typically the high outflows coincide with dollar strength. Interestingly, it’s not so this time. The Dollar Index has been languishing near 3-month lows. What’s the big worry for foreign investors now?
According to Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments, “It is important to understand that FPIs were consistent investors in the primary market even while selling in the cash market through exchanges. The important takeaway from this dualistic behaviour of the FPIs is that whenever valuations get stretched in the secondary market, they sell but consistently buy in the primary market (QIP), where valuations are fair. So long as valuations remain elevated, this trend will continue.”
Three reasons why FII selling picks pace in July
Therefore, valuations are no doubt one of the key worries for the FIIs. But apart from that, the delay in India-US trade deal is also a cause for concern.
1. India valuations the big worry
The markets may have moved in a rangebound fashion, but slowly and steadily, in terms of valuation, India has scaled past the attractive zone and is fast approaching the expensive arena. A recent report by Jefferies indicates that the valuation of MSCI India Index is nearly 1.5x higher than the 10-year average valuation of India. Even compared to other Emerging Markets, India is trading at a premium.
According to a recent study by Prabhudas Lilladher Asset Management, the asset management division of PL Capital Group, valuations have seen a “modest shift towards the expensive zone, particularly in the small and midcap segments. However, valuations remain largely justified given the underlying earnings trajectory and improved macro conditions.”
2. Delays in India-US trade deal
The latest reports on Reuters indicate that the prospects of an interim trade deal between India and the United States have dimmed ahead of the August 1 deadline. A deadlock over tariff cuts on key agricultural and dairy products continues.
India’s trade delegation has returned after a fifth round of talks without much breakthrough. As per Reuters, “An interim deal before August 1 looks difficult, though virtual discussions are ongoing,” one of the Indian government sources shared with the international news agency. The US delegation is expected to visit New Delhi soon to continue negotiations.
Meanwhile, US negotiations with India have kindled some hope. As per market veteran Ajay Bagga, “The US-Japan trade deal, bringing tariffs on Japanese goods to 15%, is leading to a sharp short squeeze in Japan and helping global markets this morning. Against threats of 25% , this 15% deal is seeing Japanese automaker stocks rise as much as 15% this morning in Tokyo. Markets are hoping that similar deals will be announced with key economies like the EU and India as well.”
3. Earnings worries
The Q1FY26 earnings trajectory has been far from encouraging. After the surprise surge seen in Q4, Q1 results have been rather subdued. Most companies are cautious on the back of macro headwinds and uncertainty ahead. Cost optimisation, vendor consolidation, and efficiency-led technology transformations are the key focus areas going forward. The demand environment ahead is a big worry for the investors.
What’s different this time – Dollar drama
If we see the trend in the last 1 year, the FII selling has in general coincided with the dollar gaining strength. However, what’s different this time is that the dollar is languishing at 3-month lows. The Dollar Index is hovering around the 97 mark, down over 10% from its January highs of 110.
According to Gaura Sen Gupta, Chief Economist at IDFC FIRST Bank Economics Research, “The impact of risk-off sentiment on capital flows to India is visible with Q1FY26 Balance of Payments tracking at just $0.8 billion. The Net FPI inflows have remained muted with outflows in debt and subdued equity inflows. For the full year FY26, we expect a small balance of Payment surplus of $14 billion, led by some improvement in FDI inflows and ECB inflows. The estimate also incorporates current account deficit remain low at 1.0% of GDP.”
Given the pronounced dollar weakness, “we continue to expect mild depreciation pressures on the rupee. Other factors that keep pressure on the rupee are low-interest rate differentials,” added Sen Gupta. Given the backdrop of global growth slowdown, the dollar-rupee is seen around 87.25/$ by March next year.
