Foreign investors are pulling back significantly from the Indian equity market, with a staggering ₹24,753 crore (approximately $2.8 billion) withdrawn in just the first week of March. This trend comes amid rising global trade tensions and disappointing corporate earnings, which have led to a cautious sentiment among overseas investors.
Continued Outflows from Indian Equities
The recent withdrawal is part of a troubling pattern, following an outflow of ₹34,574 crore in February and ₹78,027 crore in January. So far in 2025, the total outflow by Foreign Portfolio Investors (FPIs) has reached an alarming ₹1.37 lakh crore, according to depository data.
- March 2025: ₹24,753 crore
- February 2025: ₹34,574 crore
- January 2025: ₹78,027 crore
This marks the 13th consecutive week of net outflows, with FPIs having offloaded shares worth a total of $17.1 billion since December 13, 2024.
Factors Behind the Withdrawal
The persistent sell-off by foreign investors can be attributed to both global and domestic challenges. A significant driver is the escalating global trade tensions, which have negatively impacted investor confidence. According to Himanshu Srivastava, Associate Director of Manager Research at Morningstar Investment, increased tariffs by the U.S. on countries like Mexico, Canada, and China, along with reciprocal tariffs affecting India, have dampened market sentiment.
On the domestic side, underwhelming corporate earnings have further fueled negative perceptions. These earnings have not met the expectations set by investors, prompting FPIs to be more cautious about Indian equities. Additionally, the weakening Indian rupee has reduced the attractiveness of Indian assets, making them less appealing to foreign investors.
Concerns Over Returns and Tax Structures
Vaibhav Porwal, co-founder of Dezerv, emphasized that the depreciation of the rupee has cut into the returns for FPIs. Furthermore, India’s tax structure—12.5% on long-term capital gains and 20% on short-term gains—compared unfavorably to other markets that offer lower or even zero tax options.
Adding to the concerns, VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted a growing interest in Chinese stocks, which have seen strong performance due to attractive valuations and supportive government initiatives. The Hang Seng Index has surged with a year-to-date return of 23.48%, contrasting sharply with the Nifty’s decline of 5%.
A Shift in Investment Focus
Despite this climate of uncertainty, investors are shifting their focus towards domestic consumption-driven sectors, notably financials, telecom, hotels, and aviation. Meanwhile, there was a minor investment of ₹2,405 crore in the debt general limit, alongside a withdrawal of ₹377 crore from the debt voluntary retention route.
The overall trend indicates a growing caution among foreign investors, who have drastically reduced their investments in Indian equities throughout 2024, resulting in net inflows of only ₹427 crore. This is a stark contrast to the ₹1.71 lakh crore net inflows recorded in 2023, which were driven by optimism regarding India’s robust economic fundamentals. In comparison, 2022 experienced a net outflow of ₹1.21 lakh crore, largely due to aggressive interest rate hikes by global central banks.
Conclusion
As foreign investors recalibrate their strategies in light of ongoing global and domestic challenges, the Indian equity market faces a significant test. Understanding the dynamics of foreign investment flows will be crucial for stakeholders looking to navigate these turbulent waters effectively.
