Foreign investors have remained cautious ahead of the Union Budget amid expectations of limited policy changes.
Foreign Portfolio Investors
The selloff of listed stocks by foreign portfolio investors (FPIs) has exceeded $3 billion in January, marking the highest monthly outflow since August 2025.
The selling has persisted even as FPIs remained net buyers in several other emerging markets, including South Korea, Taiwan, Indonesia, and Thailand.
The absence of progress on an India-US trade agreement, muted corporate earnings growth, and India's limited participation in the global rally in artificial intelligence stocks are being cited as key reasons behind the sustained outflows.
Emerging Markets
Foreign investors have remained cautious ahead of the Union Budget amid expectations of limited policy changes.
Early earnings disclosures for the third quarter (October-December) of 2025-26 (Q3FY26) have reinforced concerns around profitability.
The combined net profit of 143 early-reporting companies rose just 3.5 per cent year-on-year (Y-o-Y), sharply lower than the 11.2 per cent growth recorded in Q3FY25 and 10.1 per cent in Q2FY26.
"FPIs have been uneasy for the last two years because earnings growth has been modest. Over a long period, India's earnings growth in dollar terms has been limited while the market is trading at around 20 times one-year forward earnings," said Saurabh Mukherjea, founder of Marcellus Investment Managers.
"There is no sign of earnings momentum this quarter either. On top of that, currency depreciation has added to their concerns," added Mukherjea.
The rupee depreciated about 5 per cent against the US dollar in 2025.
At the same time, strong domestic equity inflows have provided FPIs with ample exit opportunities, allowing them to sell into the market without materially disrupting prices.
India-US Trade Agreement
Indian equities have remained volatile since September 2024 amid slowing corporate profit growth and uncertainty surrounding the trade negotiations with the US.
A 90-day tariff pause announced by US President Donald Trump in April briefly improved sentiment, prompting FPIs to turn net buyers between March and June 2025.
However, renewed trade tensions -- culminating in the imposition of a 50 per cent tariff on India -- once again unsettled foreign investors.
FPIs have since been net sellers in four of the six months following August 2025.
AI Stocks
Market participants say a durable turnaround in FPI flows will hinge on a breakthrough in the India-US trade talks and a meaningful recovery in corporate earnings.
A shift in the narrative around the artificial intelligence (AI) trade, along with a slowdown in India's initial public offering (IPO) pipeline, could help moderate selling pressure and potentially lead to marginal inflows.
"There is a view that the AI trade may be a bubble, and that capital could eventually rotate into Indian information technology services companies," said U R Bhat, cofounder, Alphaniti Fintech.
"But the dominant factor behind FPI selling is heightened uncertainty arising from policy signals and statements by Donald Trump, which tend to unsettle markets," added Bhat.
Key Points
- FPI selling crossed $3 billion in January, the highest monthly outflow since August 2025.
- India underperformed other emerging markets, where FPIs remained net buyers.
- Muted corporate earnings growth and weak Q3FY26 profit numbers weighed on sentiment.
- India-US trade uncertainty and tariff actions renewed concerns among foreign investors.
- Domestic equity inflows cushioned markets, allowing FPIs to exit without sharp price disruption.
Feature Presentation: Ashish Narsale/Rediff
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