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The Indian equity market experienced significant turmoil in January 2025, marked by substantial foreign portfolio investor (FPI) outflows totaling Rs 78,027 crore. This contributed to a four-month downward trend, representing the worst performance in 23 years. Several factors converged to create this challenging market environment. Poor earnings reports, a general economic uncertainty, and significant capital flight to more attractive foreign markets all played a role in dampening the market's previously record-high valuations. The strengthening of the US dollar, coupled with rising US bond yields following Donald Trump's re-election, made American assets significantly more appealing to international investors, thus diverting capital away from Indian equities. This trend was not entirely unexpected, as previous months had already shown signs of FPI withdrawal, with October and November witnessing net outflows of Rs 94,017 crore and Rs 21,612 crore, respectively. The contrast to December 2024, when FPIs were net buyers of Rs 15,448 crore, underscores the abrupt shift in investment sentiment.
Deepak Shenoy, CEO of Capitalmind Financial Services, offered insight into the evolving situation. His observations in early February revealed a surprising trend: while FPIs had sold Rs 2,600 crore in equities, they simultaneously purchased Rs 13,400 crore in debt. This significant debt buying activity, according to Shenoy, suggests that the weakening of the rupee is largely speculative and that underlying capital flows remain positive. This nuanced perspective challenges the simplistic narrative of a complete market exodus, instead highlighting a strategic reallocation of investments by FPIs within the Indian market. Other experts weighed in, providing additional perspectives on the underlying causes of FPI outflows. Sanjeev Hota, from Mirae Asset Sharekhan, cited the strong dollar, high US bond yields, tariff concerns, slow domestic economic growth, and high stock valuations as key factors driving FPIs away from Indian equities.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, offered a different angle, pointing to the robust performance of the US economy and corporate earnings as the primary driver of FPI withdrawals. He emphasized that the superior growth and earnings trajectory of the US market relative to India's recent performance is a significant factor influencing investment decisions. While acknowledging the Budget's positive impact on market sentiment, Vijayakumar also noted the uncertainty introduced by President Trump's protectionist tariff policies, creating further disruption in the global economic landscape. The contrasting perspectives highlight the complexity of the situation, with a multitude of intertwining domestic and international factors influencing FPI behavior. The FPI sell-off was partially offset by the actions of domestic institutional investors (DIIs), who injected a significant Rs 86,591 crore into the market. This helped mitigate the impact of FPI withdrawals and prevented a more substantial market downturn. However, this counterbalance only partially offset the losses, as both the Nifty 50 and Sensex experienced declines of over 0.5% at the end of January, marking the fourth consecutive month of losses – an unprecedented event in the last 23 years.
The impact was particularly harsh on mid- and small-cap stocks. The Nifty Small Cap 100 index experienced a sharp 10% drop, the most significant monthly decline since February 2022. Similarly, the Nifty Midcap 100 index fell by 6.10%, reflecting the disproportionate impact of the market downturn on these segments. The Economic Survey 2025 provided further context, revealing that FPIs have invested Rs 62,431 crore in government bonds since their inclusion in the JP Morgan index. The survey also highlighted a notable surge in FPI activity in the debt segment, with cumulative flows reaching Rs 1.1 lakh crore between October 2023 and June 2024, a direct consequence of the inclusion of Indian Government Bonds (IGB) in the JP Morgan index in October 2023. This inclusion, which granted non-residents access to specified government securities without investment limits under the Fully Accessible Route (FAR), resulted in a net inflow of over $3 billion in Indian FAR bonds in FY25, with assets under custody reaching $28 billion by December 15, 2024. This illustrates a shift in FPI strategy, emphasizing the growing attractiveness of Indian government debt despite the uncertainty in the equity market.
In conclusion, the January 2025 FPI sell-off in Indian equities was a complex event driven by a confluence of factors, including the strength of the US dollar, rising US bond yields, concerns about Trump's trade policies, and the relative performance of the US and Indian economies. While the sell-off was significant, it was partially offset by strong domestic investment and the growing interest in Indian government bonds. The situation highlights the volatility of global financial markets and the importance of understanding the diverse factors impacting investment decisions. The long-term outlook remains uncertain, depending on various economic and political developments both domestically and internationally.
Source: 'Rupee is weakening mostly speculative...': Deepak Shenoy on FPI equities sell-off in January