Why are Foreign Investors Selling Indian Stocks

Understanding the impact of Foreign Institutional Investors pulling out of the Indian market: Why are foreign investors selling Indian stocks?

The Indian stock market has been one of the best-performing market in recent years. However, in the past few months, Foreign Institutional Investors have been selling out significant amounts of money. In 2024, they sold around Rs. 3.02 lakh crore and in just two months of 2025, their selling amount was nearly  Rs. 1.2 lakh crore. In this blog, let us understand why are foreign investors selling Indian stocks.

Impact of FII Selling on the Indian Markets

Foreign investment trend in India has been impacted by the exit of Foreign Institutional Investors, making the market more unstable. In the last 6 months since September 2024, the Sensex has been corrected by around 10-11% due to a major outflow of funds from the FII selling in India.

But if we look at the domestic institutional investors (DIIs), they have been strong buyers, where they have done a buying of around Rs. 5.26 lakh crore and in 2024 and in the year 2025 till 28 February, they have done buying of Rs. 1.51 lakh crore. This has resulted in offsetting some of the selling pressure from FIIs. 

What Are the Reasons For Selling

This growing trend of FII selling raises important questions about why FIIs are pulling out of India and what factors are causing this. Let us have a look at it:

1. Subdued Earnings

• Recent company profits have been weak, with Nifty companies showing only 5% higher profits in the third quarter of FY25 compared to last year. This marks the third straight quarter of slow profit growth since mid-2020. 

• The market drop matches this slowdown, as big companies have managed just 4% profit growth in the first nine months of this financial year. Due to this poor profit numbers, we can see the impact of FII selling on stock market.

2. Reciprocal Tariff

• USA has outlined plans to introduce reciprocal tariffs against nations with excessive trade barriers, including India. The move seeks to offset India’s high tariffs on American goods by charging equal duties on Indian imports. 

• This action is set to affect areas like food products, textiles, and apparel, which are major drivers of India’s exports to America. In FY2024, the US was India’s largest trading partner, with a total mutual trade in goods of USD 119.71 billion. This included USD 77.51 billion worth of exports, USD 42.19 billion in imports, and a trade surplus of USD 35.31 billion.

3. Higher Valuations

• Looking at the Indian market valuations, the indexes are slightly overvalued, with the major overvaluations being in the small and mid-cap segments. Take the Nifty Small 100 index  it’s selling at 27 times earnings, while the Nifty Mid 100 trades at an even higher 34 times earnings.

• These high prices are making some people nervous, especially big foreign investors. They’re selling their Indian investments and moving their money to other emerging countries. The steep prices of these smaller companies suggest they might not grow as much as expected, so foreign investors are looking elsewhere for better deals.

4. FIIs Shifting Funds in other asset class

• Due to volatile markets, investors are turning more and more towards other asset classes such as gold, which is typically a safe bet and a hedge against market decline. 

• With the stock markets experiencing volatility, particularly with huge outflows from FIIs, gold has emerged as a viable alternative. The increasing demand for gold has driven its price to record levels. In February 2025, gold’s price broke an all-time high of Rs. 85,000. As a result, the markets faced pressure due to the outflow of funds.

5. Rupee Depreciation

• The Indian rupee has also touched a record low of Rs. 87 against the US dollar. Since India is a big importer, this depreciation will increase the cost of imports. Indian companies have to pay more in terms of dollars for services and goods imported from foreign nations.

• This will adversely affect the profit margins of companies since increased costs may not be passed on to consumers easily. This is one of the major reasons why FIIs are reluctant to invest in India currently since the depreciated currency can damage the overall business climate and returns on investment.

6. Government Spending Slowdown in Budget

• The new 2025 budget shows slower government spending in important areas. The defence budget got Rs. 6.81 lakh crore, up 9.53% from last year. Also, the allocation towards infrastructure remained stable at Rs. 11.21 lakh crore. 

• These tiny increases show the government is careful with spending, which could slow down the economy and make investors less confident. Companies might make less money because they will get fewer projects, and this is also one of the reasons for FII outflow from India.

7. Positive U.S. Job Data

• The latest U.S. jobs data shows that unemployment is at 4%, which is better than expected. This means the U.S. economy is strong, making it more attractive for investors. As a result, FIIs are pulling money out of Indian markets and investing in the U.S. 
• Additionally, because the U.S. economy is doing well, many experts believe chances of the Federal Reserve cutting interest rates in 2025 have gone down. With fewer rate cuts, investments in the U.S. may offer better returns, giving FIIs another reason to move their money out of India.

8. China Stimulus

• FIIs are showing more interest in China for several reasons. One big reason is the strong growth of DeepSeek, which has caught investor attention. Another factor is that Chinese companies are currently cheaper compared to other markets, making them a good investment opportunity. 
• Additionally, China’s GDP growth in Q4 was higher than expected at 5.4%, boosting investor confidence. These factors are leading FIIs to move more money into China.

What can the Investors Do?

Even though foreign money matters in Indian stocks, local investors have grown stronger lately. Regular monthly investments and money flowing into Indian mutual funds have helped keep the market steady, making it less reliant on overseas money.

Instead of worrying about daily market fluctuations, investors can focus on company fundamentals, diversify their investments, and maintain a long-term perspective. When foreign investors sell and prices decline, it can present a valuable opportunity for patient investors to buy.

Conclusion

FII selling and all the related factors have led to short-term volatility, and India’s long-term growth story could still remain strong. Retail investors can remain patient and can use market corrections as an opportunity to accumulate quality stocks at lower prices. As global economic conditions stabilize and India continues its economic reforms, FIIs may return to Indian markets, driving the next phase of growth in the equity market.