India Faces Significant Foreign Portfolio Investment Outflows in 2025

FPIs Cool on Indian Equities in July After Strong Q2 Performance

Foreign Portfolio investors (FPIs) have begun to withdraw funds from Indian equities in July, marking a shift after three consecutive months of positive inflows. Data from NSDL indicates that FPIs pulled out Rs 555 crore from teh Indian stock market by July 11th.

This outflow signals a potential weakening of FPI interest, according to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.”After three months of positive inflows, FPI has turned negative, though marginally, so far in July,” Vijayakumar observed. He linked this trend to the market’s recovery from earlier sell-offs in January and February,noting that the positive inflow trend seen in April,May,and June had reversed.Despite selling pressure on the secondary market, FPIs have maintained their presence in the primary market. “an important trend in FPI investment is that FPIs have been consistent buyers/investors in the primary market even when they have been selling through the exchanges,” Vijayakumar highlighted.The recent outflows in july are attributed to elevated valuations following the market’s rebound from March lows. Vijayakumar suggested that as other markets present more attractive, cheaper valuations, FPIs might reallocate funds to these markets as a short-term strategy.

In a broader context, India has not led performance among emerging markets in the first half of 2025, underperforming against benchmarks like the MSCI EM Index.

What are the key differences between the drivers of FPI outflows in 2008, 2013, and 2025?

Understanding the 2025 FPI Outflow trend

India’s equity markets have experienced notable foreign portfolio investment (FPI) outflows throughout the first half of 2025. This trend, impacting both the Indian stock market and broader Indian economy, is driven by a complex interplay of global and domestic factors. Unlike previous periods of outflow,the current situation appears more sustained,prompting concerns among investors and policymakers. Analyzing the causes and potential consequences is crucial for navigating this evolving landscape. Key terms related to this include FII investment,capital outflows,and market volatility.

Key Drivers of the Outflows

Several factors are contributing to the significant FPI outflows from India in 2025:

US Federal Reserve Policy: Aggressive interest rate hikes by the US Federal Reserve to combat inflation have strengthened the US dollar and made US Treasury bonds more attractive, drawing capital away from emerging markets like India.This is a primary driver of emerging market outflows.

Geopolitical Risks: Escalating geopolitical tensions, particularly in Eastern Europe and the Middle East, have increased risk aversion among global investors, leading them to seek safer havens.

China’s Economic Recovery: A surprisingly robust recovery in the Chinese economy has redirected some investment flows back to the region, impacting asian markets including India.

Domestic Political Uncertainty: The lead-up to the general elections in early 2025 created a degree of political uncertainty, causing some investors to adopt a wait-and-see approach.

High Valuations: Concerns about stretched valuations in certain segments of the Indian equity market, particularly small and mid-cap stocks, have prompted profit-taking by FPIs. This relates to Indian equity markets and market corrections.

Global Recession Fears: Increasing concerns about a potential global recession have further dampened investor sentiment, leading to a flight to safety.

Sectoral Impact of FPI Withdrawals

The impact of FPI outflows hasn’t been uniform across all sectors. Some sectors have been more vulnerable than others:

Financial Services: The banking and financial services sector has seen significant outflows, reflecting concerns about asset quality and potential economic slowdown.

Facts technology (IT): Global economic headwinds and concerns about a slowdown in IT spending have negatively impacted the IT sector, leading to FPI selling.

Consumer Discretionary: Rising inflation and concerns about consumer spending have weighed on the consumer discretionary sector, resulting in outflows.

Real Estate: While relatively resilient, the real estate sector has also experienced some FPI withdrawals due to rising interest rates and concerns about affordability.

Conversely, sectors like pharmaceuticals and healthcare have shown relative resilience, attracting some inflows despite the overall outflow trend. this highlights the importance of sectoral analysis in navigating the current market conditions.

impact on the Indian Rupee and forex Reserves

The sustained FPI outflows have put downward pressure on the Indian Rupee (INR). The Reserve Bank of india (RBI) has intervened in the foreign exchange market to stabilize the currency, utilizing its foreign exchange reserves. Though, the continued outflows are depleting these reserves, raising concerns about the sustainability of the intervention. The INR has depreciated by approximately 8% against the US dollar since the beginning of 2025. Monitoring INR/USD exchange rate is critical.

Government and RBI Responses

The Indian government and the RBI have implemented several measures to mitigate the impact of FPI outflows:

RBI Intervention: The RBI has actively intervened in the forex market to manage the volatility of the INR.

Interest Rate Hikes: The RBI has raised interest rates to curb inflation and support the Rupee, although this also risks slowing down economic growth.

Promoting Domestic Investment: The government is focusing on attracting domestic investment to offset the FPI outflows. Initiatives like the Production Linked Incentive (PLI) scheme are aimed at boosting domestic manufacturing.

Encouraging NRI investments: Efforts are underway to attract investments from Non-Resident Indians (NRIs) through various schemes and incentives.

* reviewing Capital Controls: While not currently favored, the possibility of imposing limited capital controls to stem the outflows is being discussed.

historical Context: Comparing to Past Outflow Episodes

India has experienced FPI outflows in the past,notably during the global financial crisis of 2008 and the taper tantrum of 2013. However, the current situation differs in several key aspects:

| Feature | 2008 Crisis | 2013 Taper Tantrum | 2025 Outflows |

|—|—|—|—|

| Primary Driver | Global Financial System Collapse | US Fed Tapering of QE | US Fed Rate Hikes, Geopolitical Risks |

| Rupee Depreciation | Significant | Significant | Moderate (but sustained) |

| RBI Response | Aggressive liquidity Injection | Capital Controls, Forex Intervention | Forex Intervention, Rate Hikes |

| Economic Growth Impact | Severe | Moderate | Moderate (potential for slowdown) |

The 2025 outflows are occurring against a backdrop of relatively strong economic fundamentals in India,