The Indian stock market is experiencing one of its worst sell-offs in recent years, with Foreign Portfolio Investors (FPIs) offloading stocks at an average of ₹2,700 crore per day in 2025. February alone saw ₹41,748 crore in outflows, marking the fifth consecutive month of net selling.

Amid rising global trade tensions, attractive U.S. bond yields, and weak corporate earnings, FPIs have remained net sellers for 43 out of 46 trading sessions so far this year, withdrawing a total of ₹1,23,652 crore from Indian equities.

Biggest Single-Day Sell-Off in 2025

On the last trading day of February, FPIs dumped ₹11,639 crore worth of Indian stocks, surpassing the previous record of ₹8,132 crore set on January 14. The trend of aggressive selling has further weighed down the benchmark indices:

• Nifty 50 and Sensex fell 6% in February, marking their biggest monthly decline since October 2024.
• Broader markets suffered even more, with the Nifty Midcap 100 and Nifty Small-cap 100 correcting 25% from their all-time highs.
• The Indian rupee depreciated by 0.9% in February due to sustained foreign investor outflows.

Domestic Investors Struggle to Absorb Selling Pressure

While Domestic Institutional Investors (DIIs) have stepped in to absorb some of the FPI selling, their efforts have not been enough to support the markets. High-net-worth individuals (HNIs), family offices, and retail investors are also reducing their exposure, further intensifying the market downturn.

Why Are FPIs Selling?

The relentless selling by foreign investors is driven by a combination of global and domestic factors:

1. Higher U.S. Bond Yields – With U.S. Treasury yields rising, foreign investors are reallocating funds to safer fixed-income assets.
2. Global Trade Uncertainty – Escalating trade tensions and weak global growth projections have added to risk aversion.
3. Weak Q3 Earnings in India – Corporate earnings have been modest, with downgrades outpacing upgrades, especially among mid-cap and small-cap stocks.
4. Valuation Concerns – Indian markets are trading at premium valuations, making them less attractive to FPIs compared to other emerging markets.
5. China's Attractiveness – Investors are redirecting funds to China, where recent policy support and tech sector optimism have improved sentiment.

FPI Holdings in Large Caps Decline

Despite their heavy withdrawals, FPIs still hold around $800 billion in Indian equities, according to BNP Paribas Exane. However, their holdings in large-cap stocks have significantly declined:

• FPI ownership in NSE-listed stocks fell by 30 basis points to a 13-year low of 17.4% in Q4 2024.
• FPI stake in Nifty 50 companies fell by 15 basis points, reaching a 12-year low of 24.3%.
• In contrast, FPI holdings in the Nifty 500 remained steady at 18.8%, indicating higher selling in large caps.

China Gains as FPIs Exit India

Reports suggest that FPIs are shifting their focus to Chinese markets, as Beijing’s recent policy measures have improved economic sentiment. The emergence of Chinese AI startup DeepSeek, which positions itself as a free alternative to ChatGPT, has also fueled optimism toward technology stocks listed in Hong Kong.

Outlook: Volatility to Persist as FPIs Stay Cautious

Market experts believe that the selling pressure is unlikely to ease in the near term. Vipul Bhowar, Senior Director, Waterfield Advisors, highlighted the key concerns affecting FPIs:

1. Earnings Uncertainty – Q3 FY25 earnings have been underwhelming, leading to reduced confidence in future growth prospects.
2. Falling Commodity Prices – This impacts companies in export-driven and raw material sectors, further reducing profit margins.
3. US Dollar Strength – A stronger U.S. dollar and rising bond yields are making Indian assets less attractive.

With these macroeconomic headwinds, FPIs are expected to remain net sellers in the near term, leading to continued market volatility. Investors are likely to wait for signs of recovery before re-entering Indian equities.

Conclusion: When Will the Selling Stop?

As long as global economic uncertainties persist, U.S. bond yields remain high, and corporate earnings remain weak, Indian equities may continue to face selling pressure. While DIIs and retail investors may provide some support, the market recovery depends on a revival in foreign investor confidence. Until then, volatility is expected to remain high, and further corrections cannot be ruled out.

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