Will FPIs stick to ‘Sell India, Buy China,’ or is a shift on the horizon?

It appears that overseas investors are reluctant to reverse their bearish stance on Indian stocks, as they continue to be net sellers, withdrawing billions of rupees from the exchanges in 2025 so far amid concerns over valuations, economic growth, and global trade uncertainties.

Capital flight is shifting from some emerging markets, including India, back to the U.S., fueled by optimism that Donald Trump’s economic policies could strengthen the U.S. economy. However, at the same time, concerns are mounting that his trade actions might lead to short-term inflationary pressures. As a result, investors are rebalancing their portfolios, reducing exposure to EMs and investing in U.S. bonds and equities.

Uncertainty surrounding interest rate cuts by the U.S. Federal Reserve in 2025 is also drawing capital to the U.S., as Trump’s tariff measures have led policymakers to adopt a wait-and-see approach before announcing another rate cut, further supporting the rise in bond yields and the U.S. Dollar Index. Meanwhile, the attractive valuations of Chinese stocks are emerging as an additional headwind for the Indian stock market.

Against this backdrop, FPIs have offloaded another ₹36,976 crore worth of Indian shares on exchanges in the current month so far after selling ₹87,374 crore in January, taking their year-to-date (YTD) outflows to ₹1.24 lakh crore, as per the NSDL data.

The relentless selling has sent the Nifty 50 and Sensex down by 5% in the current year so far, while the Nifty Midcap 100 and Nifty Smallcap 100 indices have declined by 20% in the same period. 

The sell-off has not only impacted the markets but also exerted significant pressure on the Indian rupee, which has depreciated nearly 1.50% in 2025 so far, making it the second-worst performing Asian currency after the Indonesian Rupiah.

Will China’s cheap valuations sustain FPI Interest?

According to market experts, China has attracted significant investor interest in recent months due to expectations of a economic recovery. The world’s second-largest economy has announced several monetary and fiscal measures in recent months, including interest rate cuts and the unification of minimum down payments for home loans, aimed at revitalizing the property market.

In late September 2024, China unveiled its biggest stimulus package since the pandemic, prompting investors to increase their exposure to Chinese equities, as Chinese stock valuations were relatively cheaper compared to those in India, as per the experts. 

The emergence of Chinese AI startup DeepSeek, which claims to be a free alternative to ChatGPT, has further boosted sentiment toward technology stocks, particularly those listed in Hong Kong.

Dr V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services said, ” After Trump’s victory in US presidential elections, the US market has been attracting huge capital inflows from the rest of the world. But recently, China has emerged as a major destination of portfolio flows. The Chinese president’s new initiatives with their leading businessmen have kindled hopes of a growth recovery in China.”

The Chinese stock market responded positively to this. The Hang Seng index (FIIs buy Chinese stocks through the Hong Kong stock market) shot up by 18.7% in a month in sharp contrast to the 1.55 % decline in the Nifty.

“Since Chinese stocks continue to be cheap, this ‘Sell India, Buy China’ trade may continue. But this trade has happened in the past and experience is that it will fizzle out soon since there are structural problems constraining Chinese economic revival. Revival of FII investment in India will happen when economic growth and corporate earnings revive. Indications of that are likely to happen in two to three months,” he further added.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.