In January 2025, the Indian equity markets witnessed a significant exodus of Foreign Portfolio Investors (FPIs), with net outflows amounting to a whopping ₹78,027 crore. This trend of capital flight was primarily driven by the Trump trade effect, which saw investors flocking to US assets due to the strengthening dollar and rising US bond yields. Despite the persistent selling spree, Indian policymakers maintained a calm demeanor, attributing the outflows to profit-booking rather than a cause for panic.
The FPI outflows in January were a continuation of a trend that had started in the previous months, with FPIs being net sellers for most of the month. However, a glimmer of hope shone through in December 2024 when FPIs turned into net buyers of ₹15,448 crore. This optimism was short-lived as heavy selling resumed in January, following significant outflows of ₹94,017 crore and ₹21,612 crore in October and November, respectively.
According to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the main reason behind this FPI pullout is the superior economic performance and corporate earnings in the US, which have surpassed India’s recent growth trajectory. Despite the positive sentiment generated by the Budget and expectations of growth and earnings recovery in India, the uncertainty introduced by Trump’s tariff policies has cast a shadow over the global economic outlook.
Apart from external factors, domestic challenges have also played a role in the FPI outflows. The continuous depreciation of the Indian rupee has added pressure on foreign investors to withdraw their funds from the market. Additionally, the relatively high valuation of Indian equities, coupled with macroeconomic headwinds and an unpredictable earnings season, has made investors cautious about their investments in the country.
As the fifth consecutive week of FPI selling unfolded, analysts are cautiously optimistic about a potential turnaround in the near future. If growth stabilizes, and earnings show improvement, FPIs may consider returning to the Indian markets, especially as global economic conditions continue to evolve. While the current scenario may seem bleak, the government remains hopeful that FPIs will return when the market conditions align with their investment strategies.
Expert Insights: Will the FPIs Reconsider?
According to Himanshu Srivastava, Associate Director – Manager Research at Morningstar India, the path ahead for FPIs hinges on a delicate balance of domestic and global factors. While the US economic performance continues to attract investors, the resilience of the Indian market cannot be discounted. “It’s a game of wait and watch for both FPIs and policymakers,” he remarked. “Only time will tell if the tide will turn in favor of Indian equities.”
In conclusion, the FPI outflows in the Indian equity markets reflect a complex interplay of global and domestic factors. While the current trend may seem daunting, there is a glimmer of hope on the horizon. As the world economy continues to evolve, FPIs may find their way back to the Indian markets, drawn by the promise of growth and stability. The coming months will undoubtedly shed more light on the future of FPI investments in India.
