India’s equity market faces a record FII exodus in FY25, surpassing previous outflows. Factors include shifting investments to China, US trade policies, and weak earnings.
Data from the National Securities Depository Ltd (NSDL), a key organization managing Indian securities markets, indicates that India may witness a historic outflow of foreign institutional investors (FIIs) in financial year 2025 (FY25). The sell-off has already reached Rs 115,635 crore, with January alone recording net sales of Rs 78,000 crore—one of the highest monthly outflows in history.
Rising Outflows and Market Impact
The accelerated FII withdrawal since late September 2024 has raised concerns about market stability and economic health. The BSE Sensex and NSE Nifty have dropped nearly 14% from their September 2024 peaks, while the Indian rupee continues to weaken against the US dollar. February 2025 saw an additional Rs 27,141 crore in outflows, signaling that FY25 outflows may surpass the previous record of Rs 140,010 crore set in FY22 during the COVID-19 market crisis.
Why Are FIIs Selling?
Multiple factors contribute to the exodus:
- Shift to China: Investors find Chinese markets more attractive due to low valuations and recent economic recovery efforts by the Chinese government. The Hang Seng index surged 18.7% in a month, contrasting with the Nifty’s 1.55% decline.
- US Trade Policy: Policies under the new US administration, particularly those affecting emerging markets, have led to capital reallocation.
- US Bond Yields: Rising US bond yields and a strengthening dollar have made American assets more appealing.
- Weak Corporate Earnings: India’s Q2 and Q3 FY25 earnings have fallen below expectations, prompting FIIs to pull out capital.
Market Experts Weigh In
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted that capital inflows into US markets surged after Donald Trump’s election victory. Meanwhile, China’s recent policy shifts have reignited growth hopes, drawing FIIs away from India.
Vaibhav Porwal, Co-Founder of Dezerv, highlighted that India’s market capitalization has fallen by $1 trillion since October 2024, while China’s has gained $2 trillion, reflecting a tactical shift. India’s premium valuation compared to Indonesia, South Korea, and Taiwan has also been a deterrent.
Will FII Flows Return?
Despite the current trend, analysts predict a recovery. Porwal expects FII flows to stabilize within 3–6 months, citing strong domestic demand, digital transformation, and government-led infrastructure initiatives as key long-term drivers.
Emkay Institutional Equities anticipates that selling pressure will ease by Q2 2025. The firm stated that as valuations moderate and earnings stabilize, FII activity should regain balance. Additionally, a peak in the US Dollar Index (DXY) could help curb rupee depreciation, further supporting market recovery.
As India navigates this turbulent period, investors remain watchful of global economic trends and policy decisions that could influence capital flows in the coming months.
