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The first half of August 2025 witnessed a significant outflow of foreign portfolio investments (FPIs) from Indian equities, amounting to approximately Rs 21,000 crore. This substantial withdrawal is attributed to a confluence of factors, including escalating trade tensions between the US and India, disappointing first-quarter corporate earnings, and the weakening of the Indian rupee against the US dollar. The cumulative FPI outflow from Indian equities in 2025 has now reached a staggering Rs 1.16 lakh crore, according to data compiled from depositories. This development raises concerns about the stability of the Indian stock market and the overall health of the Indian economy, particularly in light of the nation's ambitious growth targets and its reliance on foreign capital to fuel economic expansion. The persistent outflow of FPIs suggests a growing unease among international investors regarding the investment climate in India and the potential risks associated with investing in the Indian market. The situation warrants a comprehensive analysis of the underlying causes of this outflow and the potential implications for the Indian economy.
One of the primary drivers of the FPI exodus is the heightened trade tensions between the US and India. The imposition of tariffs and other trade barriers by both countries has created uncertainty and dampened investor sentiment. The threat of further trade restrictions, particularly the proposed 25 percent secondary tariff on India, has further exacerbated the situation. Investors are wary of the potential impact of these trade disputes on Indian companies that rely on exports to the US market. The uncertainty surrounding trade policies has led to a risk-averse approach among FPIs, who are opting to reduce their exposure to Indian equities and seek safer investment destinations. The global trade environment has become increasingly volatile and unpredictable, making it difficult for investors to assess the potential risks and rewards of investing in emerging markets like India. The trade tensions between the US and India are just one example of the broader trend of protectionism and trade disputes that are disrupting global trade flows and impacting investor confidence.
In addition to trade tensions, the lackluster performance of Indian companies in the first quarter of 2025 has also contributed to the FPI outflow. Many companies have reported disappointing earnings results, which have raised concerns about the overall health of the Indian corporate sector. The weak earnings performance is attributed to a variety of factors, including slowing economic growth, rising input costs, and increased competition. Investors are scrutinizing corporate earnings closely to assess the potential for future growth and profitability. The underwhelming performance of Indian companies has made Indian equities less attractive to FPIs, who are seeking higher returns on their investments. The slow pace of economic reforms and the persistent challenges faced by Indian businesses have also contributed to the negative sentiment among foreign investors.
Another factor influencing the FPI outflow is the weakening of the Indian rupee against the US dollar. A weaker rupee makes Indian assets less attractive to foreign investors, as it reduces the value of their investments when converted back into their home currencies. The rupee has been under pressure due to a variety of factors, including global economic uncertainty, rising oil prices, and capital outflows. The Reserve Bank of India (RBI) has intervened in the foreign exchange market to support the rupee, but its efforts have had limited success. The depreciation of the rupee has further exacerbated the concerns of FPIs and contributed to the outflow of capital from Indian equities. A stable and strong currency is essential for attracting foreign investment and maintaining investor confidence.
However, there are also some positive developments that could potentially reverse the trend of FPI outflows. The recent easing of tensions between the US and Russia, coupled with the absence of fresh sanctions, suggests that the proposed 25 percent secondary tariff on India is unlikely to take effect after August 27. This development could provide some relief to Indian companies that rely on exports to the US market and boost investor sentiment. Furthermore, S&P has upgraded India's credit rating from BBB- to BBB, a move that could further enhance the attractiveness of Indian assets to foreign investors. A higher credit rating indicates a lower risk of default and makes it easier for the Indian government and companies to access international capital markets. These positive developments could help to mitigate the negative impact of the trade tensions and weak corporate earnings and potentially attract renewed interest from FPIs.
According to experts, the FPI activity in the coming months will be largely influenced by developments on the tariff front. Any further escalation of trade tensions between the US and India could trigger another wave of FPI outflows. On the other hand, a resolution of the trade disputes could lead to a rebound in FPI inflows. The performance of the Indian economy and the progress of economic reforms will also play a crucial role in determining the future course of FPI activity. The Indian government needs to take proactive steps to address the concerns of foreign investors and create a more stable and predictable investment climate. This includes implementing reforms to improve the ease of doing business, reduce red tape, and promote transparency and accountability.
Himanshu Srivastava, Associate Director - Manager Research at Morningstar Investment Research India, noted that the sustained outflows are being driven primarily by a confluence of global uncertainties. He highlighted the heightened geopolitical tensions and ambiguity surrounding the interest rate trajectory in developed economies, particularly the United States, as key factors contributing to a risk-averse sentiment among investors. He also pointed out that the recent strengthening of the US dollar tends to reduce the relative attractiveness of emerging market assets like India's. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, added that tepid earnings growth and elevated valuations have also contributed to the FPI outflow. These expert opinions underscore the complex interplay of global and domestic factors that are influencing FPI activity in India.
On the sectoral front, sustained selling in IT stocks has pulled the IT index down. This reflects concerns about the impact of global economic headwinds and technological disruptions on the Indian IT sector. However, banking and financials continue to be relatively resilient due to fair valuations and institutional buying. This suggests that the Indian financial sector is relatively well-positioned to weather the current economic challenges. On the other hand, FPIs invested Rs 4,469 crore in the debt general limit and pumped Rs 232 crore into the debt voluntary retention route during the period under review. This indicates that while FPIs are reducing their exposure to Indian equities, they are still investing in Indian debt markets, albeit at a smaller scale. The allocation of FPI investments across different asset classes reflects their assessment of the relative risks and rewards of investing in the Indian market.
In conclusion, the recent FPI outflow from Indian equities is a significant development that warrants close attention. The outflow is attributed to a combination of factors, including trade tensions, weak corporate earnings, and a weakening rupee. While there are some positive developments that could potentially reverse the trend, the overall outlook remains uncertain. The Indian government needs to take proactive steps to address the concerns of foreign investors and create a more stable and predictable investment climate. A healthy and vibrant Indian economy requires a sustained flow of foreign investment, and the government must prioritize policies that promote investor confidence and attract capital from abroad. The situation demands a comprehensive and coordinated approach to address the underlying causes of the FPI outflow and ensure the long-term stability and growth of the Indian economy. The interplay of global economic forces, domestic policy decisions, and investor sentiment will ultimately determine the future trajectory of FPI flows into India.