Why are foreign investors exiting India? 3 reasons behind stock market selloff

Experts suggest that the trajectory of future FPI flows will largely depend on how India maintains macroeconomic stability and improves corporate earnings.

In Short

• FPIs withdraw a staggering Rs 1,36,000 crore in just six weeks
• Invest Rs 9,931 crore in IPOs despite secondary market exits
• High valuations, weak earnings, Trump trade fuel FPI sell-off

Foreign Portfolio Investors (FPIs) are pulling out of Indian markets at a pace not seen in recent times. October alone witnessed massive outflows of Rs 113,858 crore, followed by an additional Rs 22,420 crore in just the first half of November, according to NSDL data.

Experts point to a combination of factors behind this exodus. Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, breaks it down: “The relentless FPI selling has been triggered by the cumulative impact of three factors: one, the high valuations in India; two, concerns regarding the earnings downgrade; and three, the Trump trade.”

Vipul Bhowar, Senior Director, Listed Investments at Waterfield Advisors, said, “Weak earnings, high valuations compared to other markets, and global economic influences such as rising US bond yields have led to the selling activity by FIIs.”

Interestingly, while FPIs have been pulling out of the cash market, offloading Rs 32,351 crore in November so far, they have pumped Rs 9,931 crore into the primary market. Big-ticket IPOs like Swiggy and Hyundai seem to have caught their attention.

“Some of the selling by FIIs in the secondary market is being counterbalanced by buying in the primary market through large IPOs. It is expected that FIIs will reduce their selling as we near the end of the calendar year,” added Bhowar.

Another major factor influencing the FPI strategy is the Trump effect. “The Trump victory has impacted both the equity and bond markets in the US. 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,” said Vijayakumar.

Rising US bond yields are further pressuring emerging markets like India. “The sharp up move 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 added.

FPIs are also reshuffling their sectoral bets. “This year, FPIs have been reducing their weightage in mature sectors where growth is 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,” Bhowar said.

However, challenges remain for certain industries like automobiles, metals, and construction, which are more vulnerable to global commodity price swings and infrastructure spending fluctuations.

Regulatory changes could bring some relief. “The new framework established by the RBI and SEBI for reclassifying foreign FPIs as FDIs is expected to positively impact foreign inflows into India. This framework provides greater flexibility for foreign investors and reduces barriers to entry,” says Bhowar.

Experts suggest that the trajectory of future FPI flows will largely depend on how India maintains macroeconomic stability and improves corporate earnings.

(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)