The heavy selling by Foreign Institutional Investors (FIIs) in the Indian stock market has become a major concern for investors. In recent months, FIIs have pulled out a substantial amount of money from the Indian stock market, leading to increased volatility.
This sell-off is not only affecting the Sensex and Nifty but also putting pressure on various sectors, as well as small-cap and mid-cap stocks. In such a scenario, it is crucial to understand why foreign investors are withdrawing funds and what impact this has on the Indian market.
What’s Happening?
Since October 2024, Foreign Portfolio Investors (FPIs) have sold nearly Rs 2.81 lakh crore worth of Indian stocks. This marks the second-largest sell-off in the last decade, significantly impacting market performance. Over the past 10 years, there have been multiple instances where FPIs continued selling for three or more consecutive months.
As a result of this sell-off, the Indian market has witnessed a decline, and uncertainty among investors has risen. Although domestic investors have helped cushion some of the impact, the consistent withdrawal by foreign investors remains a major concern for the market.
Why Are Foreign Investors Selling?
Several global and domestic factors are driving this FII sell-off:
Global Market Influence: The recent sell-off was triggered by a downturn on Wall Street, but the FPI exodus had already begun in September 2024. The rise in U.S. bond yields and a stronger dollar have further intensified this trend.
High Valuations: The valuation of the Indian stock market is significantly higher than other Asian markets. The Nifty 50 index is trading at 19 times its one-year forward earnings, while South Korea’s KOSPI is at 9.2x and China’s Shanghai Composite at 12x. This makes Indian stocks relatively expensive.
Upcoming IPO Lock-in Expiry: The lock-in period for shares worth $26 billion allocated in recent IPOs will expire in the coming months. Companies such as Hexaware Tech, Dr Agarwal Healthcare, Ajax Engineering, and Premier Energies, are among them.
Impact on the Indian Market
Nifty 50 and Sensex have dropped more than 15% from their recent all-time highs, with FIIs selling over Rs 1.5 lakh crore worth of stocks in 2025 alone. However, this is not the first time FIIs have been selling — this trend has been ongoing since 2021, as shown in the table below:
If we look at February 2025 alone, the Sensex fell by 5.6%, and the Nifty declined by 5.9%. Meanwhile, the broader market took an even bigger hit, with the BSE Midcap index down by 10.5% and the Smallcap index plunging 14%, heightening investor concerns.
What Does It Means for Investors?
The FII sell-off has made the market volatile, but this situation also presents an opportunity for long-term investors, as fundamentally strong stocks are now available at better valuations. The fundamentals of the Indian economy remain strong, and corporate earnings growth could help restore market stability. However, investors should stay cautious and focus on selecting the right stocks for their portfolios.
What’s Next?
According to Moneycontrol, investors are eagerly awaiting the return of FIIs, but expert opinions vary. Some analysts believe that markets like the U.S. and China remain more attractive, and weaker corporate earnings in India may keep FII inflows limited in the near term, even if valuations correct.
On the other hand, some analysts argue that the FII sell-off is more of a necessity than a reflection of any major shift in market sentiment. Moneycontrol reports that Axis Securities analyst Rajesh Palviya noted that February saw lower FII selling primarily due to fewer trading days, not because the pace of selling had slowed. He believes that despite the recent market correction, FIIs are maintaining their selling trend, and no significant reversal is expected in the near future.
*The companies mentioned in the article are for information purposes only. This is not an investment advice.
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