Foreign Portfolio Investors (FPIs) have sharply reduced their exposure to Indian markets. October saw outflows of nearly ₹1.14 lakh crore, followed by ₹22,420 crore in the first half of November, the latest NSDL data reveals. While FPIs invested ₹9,931 crore in the primary market, they sold ₹32,351 crore in the cash market, alongside ₹4,717 crore in the debt market. These outflows are primarily driven by the pressure from rising US bond yields and a stronger dollar.

Experts attribute the relentless FPI selling to the cumulative impact of weak earnings posted by companies this quarter, high valuations in the Indian markets compared to others, and global economic pressures, including rising US bond yields.

“Equities have boomed on expectations of the positive impact of the promised corporate tax cut by Trump and his pro-business policies. The bond market has been impacted by concerns of the potentially rising fiscal deficit under Trump,” says Dr V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

“The sharp upmove of the 10-year US bond yield to 4.42% has negative implications for emerging markets. This is reflected in the FPI selling in the debt market, too,” he adds.

“While some of the selling by FIIs in the secondary market is being counterbalanced by buying in the primary market—through large initial public offerings like those from Swiggy and Hyundai—it is expected that FIIs will reduce their selling as we near the end of the calendar year,” says Vipul Bhowar, senior director (listed investments), Waterfield Advisors.

“Fresh allocations or significant investments are likely to occur once there is greater clarity regarding the Trump administration's policies,” adds Bowar.

Furthermore, FPIs are reshuffling their sectoral allocations, switching from mature sectors to high-growth sectors.

“FPIs this calendar year have been reducing their weightage in mature sectors when growth would be closer to our nominal GDP and allocating capital to high-growth businesses. For example, in the financial sectors, FPIs have been increasing allocation in Capital Market themes like Asset management, exchanges, and healthcare,” says Bowar.

As a result, sectors like automobiles, metals, and construction may face pressures due to global commodity price volatility, rising costs, and fluctuating capex.

Experts however suggest that regulatory changes could offer some respite to foreign inflows. The new framework by the RBI and SEBI, allowing FPIs to be reclassified as FDIs, is expected to attract more foreign investment by providing greater flexibility and reducing entry barriers.

"With the new regulations, FPIs can hold larger stakes in Indian companies without the need for immediate divestment. This creates opportunities for increased foreign investment, particularly in mid-cap companies, and helps attract long-term capital,” Bowar says.

While experts remain hopeful for improved FPI inflows, their current persistent sell-off has put pressure on Indian equities, dragging the benchmark indices into correction territory. Yet, domestic institutional investors have consistently been injecting lakhs of money into the Indian markets to counter the bearish sentiment among foreign investors signalled by their heavy outflows. However, the market remains under strain.

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