Global funds have pulled out Rs 1.54 trillion from domestic stocks in fiscal 2024 – 25 (FY25), the highest-ever outflow recorded so far, according to the data compiled by Business Standard.
The last time the global funds exited Indian shores in droves was back in 2022, when they sold a net Rs 1.41 in the backdrop of Covid-19.
Their sell-off, however, was countered by domestic investors whose ‘buy-on-dips strategy’ saw them put in a record Rs 6 trillion in the Indian equities in India during FY25, data shows.
This compares to Rs 2 trillion and Rs 2.56 invested in FY24 and FY23, respectively, data shows.
While foreign investors lapped up domestic stocks in three of the first six months of the fiscal (April to September), they have been net sellers since October 2024 amid stretched valuations and mounting growth slowdown woes.
That apart, China's stimulus measures to revive the economy, along with US President Donald Trump's tariff threats, also impacted their investment decision as regards Indian equities.
"Lowering earning growth rate, global uncertainties, high US bond yields, and a US Policy shift were among the key triggers leading to FIIs pull out," noted Rajesh Palviya, senior vice president of research at Axis Securities.
Among sellers, the long-only, pension, and insurance funds have been at the forefront of this aggressive selling due to US protectionist policies, Palviya noted.
Against this, Nifty50 and Sensex are en-route to end this fiscal slightly higher, up 4 per cent, while the small and midcap indices are set to end up to 5 per cent higher.
They are down nearly 14 per cent from their peak as a result of foreign exodus.
Amidst the rout, valuations of key gauges have been tamed with the Nifty50's price-to-earnings (P/E ratio) quoting 18.8x, down from its peak of 23.8x in September 2024.
For the Nifty MidCap and SmallCap indices, the P/E multiple has eased from 42x and 28x to 30x and 23x, respectively.
The road ahead
Analysts remain cautious on the recent sustenance of the reversal of foreign funds’ flows as uncertainties – both domestic and at the global level still loom large.
However, if global risk appetite neutralises, they believe, India could benefit as the country's economic outlook for FY26 remains upbeat.
"Global uncertainties and micro challenges will shape FII flows in FY26, with global liquidity playing a crucial role in their outlook towards Emerging Markets (EMs), including India," said Prashanth Tapse, senior vice president for research at Mehta Equities.
That said, while the global funds' outlook on India continues to be neutral to negative in the near-term, the long-term viewpoint remains strong, according to analysts.
Any change in the near-term outlook, they said, would be dependent on multiple microeconomic factors like earnings growth, growth-focused consumption measures and the central bank's rate cut cycle.
India will also face reciprocal tariffs from the US on April 2, a move that could potentially hurt India's key exports like agricultural and pharmaceutical goods, market experts opined.
"Strong growth in the gross domestic product (GDP), lower inflation, and reasonable valuation will be key for market recovery and FIIs return," said Chethan Shenoy, director and head of product and research at Anand Rathi Wealth.
Though, over the medium-term, we expect Nifty50 to deliver a CAGR of 11-13 per cent given the strong macroeconomic and earnings growth outlook, he added.
As a strategy, Shenoy suggests investors should stay put with their current investments, maintaining an asset allocation strategy of 80 per cent in equity and 20 per cent in debt for long-term wealth generation.
"In equity, investors should diversify across all market caps with 50-55 per cent in large-caps, 20-25 per cent in midcaps, and the rest in smallcaps," he said.
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