Rising US yields, global trade tensions draw FPIs away from Indian stock market. Will outflows persist?

Foreign Portfolio Investors (FPIs) persist in withdrawing billions of rupees from the Indian stock market in 2025, aggressively offloading Indian shares on exchanges daily. While concerns over elevated valuations, a decelerating Indian economy, and a subdued December quarter performance have already dampened sentiment, escalating global trade tensions have further exacerbated investor uncertainty, prompting a broader reassessment of risk exposure.

India is not alone in witnessing sustained outflows from FPIs; other Asian markets are also experiencing similar pressure, leaving equities without support. So far this month, FPIs have offloaded another ₹22,929 crore worth of Indian shares on exchanges after selling ₹87,374 crore in January, taking their year-to-date (YTD) outflows to ₹1.10 lakh crore.

Although most of the selling by FPIs is being absorbed by domestic mutual funds, selling by high-net-worth individuals (HNIs), family offices, alternative investment funds (AIFs), and retail investors is adding significant pressure on the markets.

The broader market, in particular, is bearing the brunt of heavy FPI selling, as the Nifty Midcap 100 index and Nifty Smallcap 100 index have declined by up to 20% in less than 5 months. What initially started as profit-booking in October has deepened over the following months as earnings fell short of Street estimates, raising concerns over valuations.

Investors had anticipated earnings rebound from India Inc. in the December quarter to justify the premium valuations. However, corporate results fell short of expectations, prompting brokerage firms to revise downward their earnings per share (EPS) projections and, consequently, target multiples.

While domestic macroeconomic concerns continue to weigh on sentiment, Donald Trump’s tariff announcement has exacerbated overseas investors sentiment, fueling fears of an imminent global trade war as affected nations explore retaliatory measures.

On February 13, Trump instructed his economic team to devise plans for reciprocal tariffs on all countries that impose levies on U.S. imports. Although the implementation of these duties is expected to take another 2 to 3 months, apprehensions persist that India could face significant repercussions from the retaliatory tariff measures, as Trump had earlier criticised India’s high tariffs on U.S. products.

Trump also warned again on Friday that BRICS nations could face tariffs from the United States if they set up their own currency. Earlier last week, Trump announced a 25% tariff hike on steel and aluminium imports, applying “without exceptions or exemptions.”

Meanwhile, Trump’s trade policies have not only unsettled market sentiment but have also influenced the U.S. Federal Reserve’s decision to pause its rate-cut cycle in January, as policymakers decided to wait to assess how Trump’s policies will affect the economy.

Inflation in the US has already surged up sharply in January, and analysts anticipate a further uptick in February as the newly imposed tariffs take effect. Amid mounting concerns over Trump’s policy stance and the Fed’s cautious monetary approach, U.S. bond yields have climbed, making U.S. assets increasingly attractive to global investors.

The yield on the 10-year U. Treasury note approached 5% in mid-January, the highest level since November 2023. 

Global policy shifts create uncertainty for FPIs

Vipul Bhowar, Senior Director of Listed Investments at Waterfield Advisors, pointed out that recent shifts in global policies, particularly from the U.S., have introduced uncertainty among FIIs, prompting them to recalibrate their investment strategies in dynamic markets like India.

“The allure of US assets has intensified, driven by rising bond yields that have made these investments seem more secure. This has led many FIIs to pivot away from Indian and other emerging market stocks. Investors are increasingly drawn to the promise of safer returns offered by U.S. equities, leaving many markets, including India, in their shadow. Compounding this trend is a noticeable slowdown in corporate sales growth within India, further fueling the exodus of capital from Indian equities. This deceleration casts a long shadow over the enthusiasm for stocks, prompting a wave of sustained selling,” Bhowar noted.

He added that the prevailing high valuations in the Indian stock market have further contributed to investor caution. “With stock prices soaring, many investors are reassessing their positions, hesitant to engage in a market that appears overheated and fraught with potential risks. This confluence of factors has created a complex investment landscape, where the once-strong appetite for Indian equities is now tempered by growing hesitation,” he concluded.

Dollar index holds the key to FPI reversal

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, highlighted that despite several positive developments—including a well-received budget, a rate cut by the RBI, and a slight improvement in Q3 results—FIIs have continued their selling spree.

“Since large-cap stocks dominate FIIs’ assets under custody, they have borne the brunt of this selling pressure. However, this relentless selling has also made valuations more attractive, creating opportunities for long-term investors. A reversal in FII strategy will occur when the dollar index declines, though the timing remains uncertain,” he said.

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.