What are FIIs doing?

FIIs have been relentlessly selling, pulling out over ₹39,000 crore from Indian equities over nine consecutive trading sessions since March 28.

From October 2024 to mid-April 2025, FIIs have offloaded over ₹1.68 lakh crore worth of Indian stocks, making FY25 one of the worst years on record for FII outflows.

Here are the factors that have fueled this bearish sentiment:

• Rising US bond yields: With the US 10-year Treasury yield hovering around 4.5%, global investors opt for safer, higher-yielding alternatives.
• Geopolitical volatility: Tensions like the US-China trade war, ongoing global conflicts, and currency instability have led investors to de-risk from emerging markets like India.
• Valuation concerns: Nifty and Sensex valuations have traded at a premium compared to Asian peers, making Indian equities less attractive.
• Strengthening of Dollar: Rupee depreciation with an increasingly strong dollar often results in capital outflows from emerging markets due to currency depreciation risks.

Many FIIs are currently in more of a standby mode, awaiting favourable valuations and more apparent signs of economic recovery and stronger earnings growth.

There is also a view that some FIIs might reallocate to markets with more attractive valuations, like China.

Despite selling Indian stocks, FIIs are still buying India indirectly. Investment in India-focused ETFs and long-only funds remains positive, suggesting confidence in the India story remains intact.

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How long do the domestic investors buffer the market?

Despite the heavy FII selling, domestic investors have largely buffered the market. Domestic institutional investors (DIIs), including mutual funds and insurers, and retail investors have poured money into equities at record levels, offsetting much of the foreign outflows.

For example, in January 2025, DIIs nearly matched FIIs, buying about ₹86,000 crore against FIIs' ₹87,000 crore sales. By mid-February, DIIs had invested ₹1.2 lakh crore year-to-date, roughly neutralising the ₹1.06 lakh crore withdrawn by FIIs in the same period.

This strong domestic participation kept large-cap indices relatively resilient, down only 3-4% by February, even with aggressive FII selling.

This highlights the strong domestic confidence in India's markets, with local institutions and retail seeing the correction as an opportunity to "buy cheap" what FIIs sold.

However, there are emerging trends within domestic investment patterns that warrant attention. According to AMFI, the number of discontinued SIP accounts surged to 54.70 lakh in February, with active accounts dropping to 44.56 lakh.

This resulted in a record-high SIP stoppage ratio of 127.5%, indicating that discontinued accounts are growing faster than new registrations.

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When will FIIs return?

Predicting exactly when FIIs will return is challenging, as it depends on a combination of various domestic and global factors. However, there are some key signs to watch out for, including:

Peak in US Interest Rates and a Weaker Dollar

A peak in U.S. interest rates and a weakening of the dollar, which is expected later in 2025, could ease pressure on emerging markets, potentially encouraging FIIs back into Indian stocks.

Declining global bond yields and lower interest rates across the space would also increase the appeal of emerging market assets like India.

A period of stability or decline in US bond yields could reduce the incentive for FIIs to move capital back to the US.

Continued stronger Indian economic performance

Sustained GDP growth, positive corporate earnings, and successful implementation of reforms would reinforce the attractiveness of Indian equities.

FIIs are looking for more evident signs of an economic gain, such as a pickup in consumer demand and private investment, and confirmation that India's growth trajectory is firmly back on track with accelerating corporate earnings.

Positive change in Indian equity valuations

A correction in the Indian market might make valuations more appealing to FIIs, potentially triggering renewed interest.

The recent market correction has made valuations more attractive than their peak levels. Further moderation or a significant correction could "reset" valuations to levels that FIIs find compelling.

The Nifty was trading at a relatively expensive valuation compared to its historical averages.

At the same time, the Shanghai Shenzhen CSI 300 index had more reasonable valuations, potentially attracting FII flows to China in the short to medium term.

Stabilising global macroeconomic conditions

Any de-escalation in global tensions, particularly those affecting major economies, could improve investor sentiment towards emerging markets.

US policy shifts, global interest rate movements, geopolitical uncertainty, and the performance of other emerging markets influence FII flows.

Stabilisation in these areas, including clarity on global trade or tariff issues, would give foreign investors more confidence to return.

US-China trade tensions could eventually lead to renewed FPI investments in India in the medium to long term, as both economies potentially face a slowdown.

Conclusion

The recent FII selling in Indian equities is a significant trend driven by factors, including profit-taking due to high valuations, concerns about earnings growth, and global macroeconomic conditions.

While domestic investors have provided a crucial buffer, the sustained return of FIIs hinges on factors like more attractive valuations, a clear recovery in corporate earnings, stabilisation of global markets, and a potential peak in US interest rates.

With such uncertainty and potential market shifts, you must have a well-defined investment strategy.

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