India’s equity market may see record annual foreign institutional investor (FII) exodus in financial year (FY25), potentially surpassing the previous record outflow of Rs 140,010 crore recorded in FY2021-22 (FY22) when the global equity market was rattled by the the COVID-19 pandemic. According to data from the National Securities Depository Ltd (NSDL), FII outflows in the current fiscal year have already reached Rs 115,635 crore. With the pace of selling accelerating in January and February 2025, there are high chances that FY25 outflows could easily exceed the FY22 figures.
In January alone, FIIs withdrew (net sales) Rs 78,000 crore, marking the second-highest monthly outflow in Indian capital market history, just below the record Rs 94,000 crore sold in October 2024. In February, outflows have already touched Rs 27,141 crore. This trend starkly contrasts with FY24, which saw one of the highest FII inflows at Rs 208,212 crore.
Since late September, FIIs have been offloading Indian equities at unprecedented levels, raising concerns about the market's health and the broader economy. This sell-off has significantly impacted market benchmarks, with the BSE Sensex and NSE Nifty plummeting by approximately 14% from their record high level seen in September 2024. The massive outflow has also contributed to the depreciation of the Indian rupee against the US dollar.
The sell-off is attributed to several factors. FIIs have been reallocating funds to markets like China, where valuations appear more attractive. US President’s trade policy and its impact on emerging markets is another reason for this exodus. US bond yields and Dollar have gained significantly in the last free months, becoming a safe haven for FIIs.
Additionally, a weaker-than-expected Q2FY25 and Q3FY25 earnings season in India has fueled concerns.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said that after Trump’s victory in the US presidential elections, the US market has been attracting huge capital inflows from the rest of the world. But recently, China has emerged as a major destination for portfolio flows. The Chinese president’s new initiatives with leading businessmen have kindled hopes of a growth recovery in China.
“The Chinese stock market responded positively, with the Hang Seng index surging by 18.7% in a month, in sharp contrast to the 1.55% decline in the Nifty. Since Chinese stocks remain cheap, this ‘Sell India, Buy China’ trade may continue,” added Vijayakumar.
Vaibhav Porwal, Co-Founder of Dezerv, highlighted that since October 2024, India's market capitalization has fallen by approximately $1 trillion, while China's has risen by $2 trillion, indicating a tactical shift in FII flows. India’s premium valuation relative to peers like Indonesia, South Korea, and Taiwan has been a headwind.
Porwal believes that FII flows could return to India in the next 3–6 months, as the economy and macro factors in the long term remain favorable. “Strong domestic demand, digital transformation, and infrastructure push are long-term drivers likely to bolster corporate earnings and sustain growth,” he said.
Emkay Institutional Equities expects FPI selling to subside by the second quarter of 2025. Emkay stated, “Despite persistent selling pressures, FPI activity is likely to stabilize post-1QCY25, with valuations having moderated and earnings forecasts bottoming out over the next 2-3m. A peak in the U.S. Dollar Index (DXY) should also ease rupee depreciation concerns and help stem FPI selling.”