Domestic Institutions Cushion Impact, but FPI Sentiment Remains Fragile
Mumbai (Economy India): Foreign Portfolio Investors (FPIs) have continued their withdrawal from Indian equity markets in December, pulling out ₹17,955 crore in the first 12 days of the month. With this, total foreign outflows in calendar year 2025 have crossed ₹1.60 lakh crore ($18.4 billion), according to data released by the National Securities Depository Limited (NSDL).
The sustained selling pressure highlights a broader shift in global capital flows as investors reassess risk amid high US interest rates, a weakening rupee, valuation concerns, and global economic uncertainty. While foreign selling has persisted, Domestic Institutional Investors (DIIs) have emerged as a critical stabilising force, investing ₹39,965 crore in December, thereby preventing sharper market corrections.
December Sell-Off: Continuation of a Broader Trend
December’s FPI outflow is not an isolated event but part of a longer pattern that has defined much of 2025. After a brief pause in October—when FPIs invested ₹14,610 crore—foreign investors resumed selling in November and accelerated exits in December.
FPI Equity Flows in 2025 (₹ crore)
| Month | Net FPI Flow |
|---|---|
| July | -17,700 |
| August | -34,990 |
| September | -23,885 |
| October | +14,610 |
| November | -3,765 |
| December (till 12th) | -17,955 |
| Total (2025) | -1.60 lakh crore+ |
Market experts note that the October inflow was largely tactical rather than structural, driven by short-term valuation comfort and earnings expectations, which quickly faded as global conditions tightened again.
Rupee Weakness: A Major Trigger for Outflows
One of the most significant factors behind the continued FPI selling has been the sharp depreciation of the Indian rupee.
- On January 1, 2025, the rupee stood at ₹85.70 per dollar
- By December 11, it weakened to an all-time low of ₹90.47
This nearly 5% depreciation has materially eroded dollar-denominated returns for foreign investors, making Indian equities less attractive even when local market indices remain relatively resilient.
Why Currency Matters for FPIs
Foreign investors measure returns in dollar terms. Even modest equity gains can turn negative when the currency weakens sharply. As a result:
- FPIs tend to exit markets with weakening currencies
- Capital flows move toward dollar-denominated assets
- Hedging costs rise, further reducing net returns
Global Interest Rates: The US Factor Looms Large
According to market experts, the US Federal Reserve’s high interest rate regime remains a dominant driver of capital outflows from emerging markets, including India.
Expert View
“With US rates staying elevated for longer, global liquidity is tight. Investors are preferring safe, high-yield assets in developed markets over riskier emerging market equities.”
— Himanshu Srivastava, Morningstar India
Higher US yields have increased the attractiveness of:
- US Treasury bonds
- Dollar-denominated money market instruments
- Investment-grade debt
This has reduced the relative appeal of emerging market equities, particularly those trading at premium valuations.
Valuation Concerns: India Looks Expensive
Another recurring concern among foreign investors is valuation. Indian equities are currently trading at a premium compared to most emerging markets.
- Nifty 50 forward P/E remains well above EM peers
- Earnings growth expectations are strong but largely priced in
- Margin pressures and global slowdown risks persist
FPIs are increasingly reallocating capital toward markets where:
- Valuations are cheaper
- Currencies are more stable
- Growth recovery is expected to be sharper
Portfolio Rebalancing and Year-End Effect
December typically witnesses portfolio rebalancing, especially among global funds aligning allocations before year-end. This seasonal effect has added to selling pressure.
According to Angel One’s Wakaar Javed Khan, multiple factors are converging:
“Weakening rupee, global portfolio rebalancing, year-end positioning, and lingering economic uncertainty are together driving FPI outflows.”
Domestic Investors Step In: The DII Cushion
Despite relentless foreign selling, Indian markets have avoided sharp corrections, largely due to strong domestic institutional buying.
- DIIs invested ₹39,965 crore in December
- Mutual fund SIP flows remain robust
- Insurance companies and pension funds continue long-term allocations
This reflects a structural shift in Indian markets, where domestic capital has become a powerful counterbalance to volatile foreign flows.
Why DIIs Are Buying
- Strong long-term India growth outlook
- Improving corporate balance sheets
- Structural reforms supporting earnings growth
- Rising household participation via mutual funds
Market Resilience Despite FPI Selling
The resilience of Indian markets amid heavy FPI selling has surprised many global investors. Benchmark indices have corrected only modestly, supported by:
- Consistent domestic inflows
- Strong banking and financial stocks
- PSU revival theme
- Infrastructure and capex-led growth
Currency, Growth and Earnings: A Delicate Balance
While India’s macro fundamentals remain strong, short-term challenges persist:
Positives:
- GDP growth among the highest globally
- Capex cycle gaining momentum
- Stable banking system
- Government infrastructure push
Risks:
- Currency volatility
- Global growth slowdown
- Commodity price fluctuations
- Geopolitical tensions
What Could Reverse FPI Outflows?
Market participants believe several triggers could bring FPIs back:
1. US Fed Rate Signals
Any indication of:
- Rate cuts
- Faster monetary easing
could improve risk appetite.
2. Currency Stabilisation
A stabilising rupee would:
- Improve dollar returns
- Reduce hedging costs
3. India-US Trade Agreement Progress
Positive developments on a bilateral trade deal could:
- Boost investor confidence
- Improve export visibility
4. Earnings Upgrades
Stronger-than-expected earnings growth could justify premium valuations.
Expert Outlook
“India’s growth and earnings outlook remains strong. Sustained FPI selling is not sustainable at these levels.”
— V.K. Vijayakumar, Geojit Investments
He adds that while near-term volatility may persist, India’s structural story remains intact.
A Structural Shift in Indian Markets
One of the most important developments of recent years is the reduced dependence on foreign capital.
- Rising domestic savings
- Deeper capital markets
- Financialisation of household savings
These factors have strengthened India’s ability to absorb global shocks.
Looking Ahead: December and Beyond
FPI activity in the remainder of December will be closely watched, with focus on:
- US Fed commentary
- Currency movement
- Global risk sentiment
- Domestic policy signals
A positive shift in any of these could slow or reverse outflows.
While the scale of FPI outflows in 2025 is significant, it does not reflect a loss of confidence in India’s long-term story. Instead, it underscores the cyclical nature of global capital flows.
Domestic investors have demonstrated growing maturity and strength, cushioning markets from external shocks. As global conditions stabilise, India remains well-positioned to attract foreign capital once again.
Economy India Takeaway
Foreign investors may be exiting in the short term, but India’s markets are increasingly powered by domestic capital, reinforcing resilience amid global uncertainty.
(Economy India)
