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The Indian stock market is facing significant headwinds due to a confluence of factors, primarily the persistent withdrawal of funds by Foreign Portfolio Investors (FPIs). In 2025 alone, FPIs have aggressively offloaded billions of rupees worth of Indian shares, exacerbating existing concerns about market valuations and the decelerating Indian economy. This outflow is not unique to India; other Asian markets are experiencing similar pressure, creating a lack of overall equity support. The sheer scale of the sell-off is alarming; FPIs sold ₹87,374 crore in January and another ₹22,929 crore in early February, resulting in a year-to-date outflow exceeding ₹1.10 lakh crore. While domestic mutual funds have absorbed much of this selling, additional pressure comes from high-net-worth individuals (HNIs), family offices, alternative investment funds (AIFs), and retail investors, all contributing to a downward trend.
The impact on the broader market is particularly severe, with the Nifty Midcap 100 and Nifty Smallcap 100 indices experiencing declines of up to 20% in under five months. This downturn, which began as profit-booking in October, has intensified as corporate earnings have fallen short of expectations. The December quarter results, which were anticipated to justify premium valuations, proved disappointing, leading brokerage firms to revise downward their earnings per share (EPS) projections and target multiples. This underperformance further dampens investor sentiment and contributes to the ongoing sell-off. The situation is compounded by a slowdown in corporate sales growth within India, adding further fuel to the exodus of capital.
Adding to the domestic macroeconomic concerns is the escalating global trade tension, particularly stemming from Donald Trump's tariff announcements. Trump's instruction to his economic team to devise plans for reciprocal tariffs on all countries imposing levies on US imports, while still in the planning stages (2-3 months), has created significant uncertainty. India, having previously faced criticism from Trump regarding its tariffs on US products, is particularly vulnerable to potential retaliatory measures. This uncertainty is further amplified by Trump's warnings to BRICS nations about potential tariffs if they establish their own currency, and his recent 25% tariff hike on steel and aluminum imports, applied without exceptions. These actions are not merely unsettling market sentiment; they have also influenced the US Federal Reserve's decision to pause its rate-cut cycle, as policymakers await the full economic impact of Trump's policies.
The resulting rise in US bond yields, driven by a combination of Trump’s protectionist trade policies and inflation (which surged sharply in January and is expected to rise further in February), is making US assets increasingly attractive to global investors. The yield on the 10-year U.S. Treasury note nearing 5% in mid-January—the highest level since November 2023—highlights this shift. This increased attractiveness of US assets is prompting FPIs to reallocate their investments away from emerging markets, including India. Vipul Bhowar of Waterfield Advisors notes that the shift in global policies, especially from the US, has created uncertainty among FIIs, causing them to recalibrate their investment strategies. The allure of higher, seemingly safer returns in the US, combined with the slowdown in Indian corporate sales growth and high valuations in the Indian stock market, is significantly contributing to the FPI exodus.
Despite positive domestic developments like a well-received budget, an RBI rate cut, and some improvement in Q3 results, the FPI selling spree continues. Dr. V K Vijayakumar of Geojit Financial Services points out that large-cap stocks, which dominate FIIs' assets under custody, have borne the brunt of this selling. However, he suggests that the sustained selling has also created more attractive valuations for long-term investors. He anticipates a reversal in FII strategy when the dollar index declines, although the timing of this remains uncertain. The situation underscores the complex interplay between domestic economic performance, global geopolitical events, and investor sentiment in shaping the trajectory of the Indian stock market. The ongoing uncertainty and the potential for further escalation of global trade tensions suggest that the FPI outflows may persist for some time, making it crucial for investors to carefully assess the risks and opportunities in the current environment.