Foreign Portfolio Investors Exit India in Record Numbers, Triggering Market Slump

Foreign Portfolio Investors (FPIs) have offloaded over $10 billion (more than ₹97,000 crore) worth of Indian equities in the first six weeks of 2025, marking the highest-ever recorded outflow during this period. This unprecedented selloff has led to the worst start for domestic markets in nearly a decade, raising concerns over economic stability and investor sentiment in India.

The primary drivers behind this capital flight include a slowdown in corporate earnings, US policy shifts favoring debt securities, and global uncertainty arising from geopolitical factors, particularly the new trade tariffs imposed by US President Donald Trump. This exodus of foreign funds has significantly impacted benchmark indices and sectoral performance, with mid-cap stocks and small-cap stocks bearing the brunt of the downturn.

Massive FPI Selloff and Its Impact on Markets The sustained outflows by FPIs have dragged the Nifty 50 down by 2.6%, while the Nifty Midcap 100 and Nifty Smallcap 100 have plummeted by 11% and 15%, respectively. This represents the steepest six-week decline at the beginning of any year since 2016 for all three indices. India has also recorded the highest FPI equity sales among emerging markets (EMs), surpassing Taiwan, where FPIs have sold $2.5 billion worth of equities in 2025.

Market participants attribute this aggressive selling to global policy shifts, particularly those coming from the US. With rising yields on US Treasury bonds and a strengthening dollar, investors are increasingly seeking safer assets, reducing their exposure to emerging markets like India.

Triggers Behind the FPI Outflows

1. US Trade Policies and Rising Tariffs

FPI outflows began in October 2024 following China's stimulus measures aimed at reviving its slowing economy. The situation worsened after Donald Trump was elected as US president, as his policy agenda introduced additional uncertainty in global markets. Since taking office, Trump has imposed multiple tariffs, including:

• A 25% levy on imports from Canada and Mexico (temporarily paused for a month).
• A 10% additional tariff on Chinese goods.
• A 25% tariff on steel and aluminum imports.

The threat of imposing reciprocal tariffs on countries that tax US imports.

According to U R Bhat, cofounder of Alphaniti Fintech, "The level of uncertainty caused by daily announcements and rollbacks is unprecedented since Trump took office. Equity markets hate uncertainty, and when it arises, investors flock to safe havens. Until there is clarity on tariff policies, investors will remain cautious."

2. Strengthening US Dollar and Treasury Yields

The dollar has strengthened considerably since October, prompting a shift towards safer assets such as 10-year US Treasury bonds. During this period:

• The rupee has depreciated by 3.6% against the US dollar.
• The 10-year US bond yield has risen by 81.5 basis points.
• The dollar index, however, has declined by 7%.

A weakening rupee negatively affects FPI returns, making Indian equities less attractive. Rising US bond yields have further tilted the risk-reward balance in favor of safer assets, diverting capital away from India.

3. Underwhelming Corporate Earnings

Adding to investor concerns, Indian corporate earnings for the October-December quarter have failed to meet expectations. The fastest deceleration in earnings growth in recent history, coupled with high stock valuations, has made even large-cap indices appear overvalued.

Saurabh Mukherjea, founder of Marcellus Investment Managers, remarked, "We are witnessing the fastest deceleration in earnings growth in a long time, coupled with high valuations. With a negative outlook for EMs and the rupee, I expect FPIs to continue selling for several months until the rupee stabilizes."

Comparative Performance Among Emerging MarketsWhile India has suffered the highest FPI equity sales, Taiwan is the second hardest-hit EM with outflows amounting to $2.5 billion. Other Asian markets have also experienced volatility, though India’s losses stand out due to the sheer scale of capital flight.

This trend suggests a broader move by investors toward developed markets as the US economic outlook improves and its fiscal policies provide higher returns on debt instruments.

Conclusion

The record outflows by FPIs in early 2025 have put immense pressure on the Indian equity markets, triggering steep declines across benchmark indices, especially in mid-cap stocks and small-cap stocks. The key drivers behind this trend include US trade policies, a strengthening dollar, rising US Treasury yields, and weaker-than-expected corporate earnings in India. Until market conditions stabilize—whether through policy clarity from the US or an improvement in domestic earnings growth—India’s equity markets are likely to remain under pressure. In the short term, investors should brace for continued volatility as global economic trends dictate capital movements. The upcoming monetary policy decisions by the US Federal Reserve and the Reserve Bank of India (RBI) will be closely watched for potential relief signals.