Why Foreign Investors Are Pulling Out of Indian Equities: A Deep Dive into 2025 Trends

Record Withdrawals from Indian Equity Markets

New Delhi: In 2025, foreign investors withdrew an unprecedented Rs 1.6 lakh crore (approximately USD 18 billion) from Indian equities, marking the largest outflow in history. This trend was driven by fluctuating currency rates, global trade tensions, particularly concerning potential tariffs from the US, and high valuations that diminished risk appetite. However, analysts predict a shift towards positive inflows in 2026.

Factors such as rising US bond yields, a stronger dollar, and geopolitical uncertainties have redirected global capital towards developed markets, leaving emerging markets like India at a disadvantage.

Despite the downturn this year, market experts are optimistic about a reversal in 2026. Garima Kapoor, deputy head of research and economist at Elara Securities India, stated, "We anticipate a sustainable return of foreign portfolio investors (FPIs) as nominal growth and earnings improve in CY26. The finalization of a trade agreement with the US should reduce tariff disparities, while potential Fed rate cuts may weaken the dollar, benefiting emerging market assets."

In addition to global influences, domestic factors are expected to contribute to the revival of investment flows. Vikas Gupta, CEO and chief investment strategist at OmniScience Capital, noted that Indian earnings growth compared to other markets, along with consistent policy and reforms—especially regarding the Union Budget—could serve as significant catalysts.

Nevertheless, global macroeconomic uncertainties will continue to impact FPI behavior. Himanshu Srivastava, principal manager-research at Morningstar Investment Research India, emphasized that the trajectory of global interest rates, particularly the timing and pace of rate cuts, along with tariff developments, will be crucial determinants. A decrease in US bond yields and a softer dollar could further enhance equity inflows.

Currently, FPIs have withdrawn Rs 1.58 lakh crore from Indian equity markets while investing over Rs 59,000 crore in the debt market as of December 26, according to depository data.

This outflow makes 2025 the worst year for equity investments, surpassing the previous record of Rs 1.21 lakh crore in 2022, following a minimal net inflow of just Rs 427 crore in 2024. In contrast, 2023 witnessed a robust equity investment of Rs 1.71 lakh crore.

Analysts attribute these trends to a combination of global and local pressures. Srivastava explained, "Persistently high US interest rates and elevated bond yields have made risk-free returns in developed markets more attractive, leading to capital rotation and a stronger dollar, which tightens financial conditions for emerging markets."

The depreciation of the rupee has further diminished dollar-based returns and increased hedging costs, reducing India's risk-adjusted attractiveness. Geopolitical uncertainties, including energy price concerns, supply chain disruptions, and trade tensions, have also negatively impacted sentiment.

Domestically, high valuations in certain sectors have prompted tactical profit-taking, according to Sorbh Gupta, head of equity at Bajaj Finserv Asset Management, who noted that these adjustments are short-term and do not reflect a reassessment of India's long-term growth potential.

The monthly flow patterns illustrate this volatility, with FPIs selling equities in eight out of twelve months in 2025, with purchases limited to April, May, June, and October.

The equity sell-off by FPIs was somewhat mitigated by strong buying from domestic institutional investors, bolstered by increasing SIP (Systematic Investment Plan) inflows from retail investors.

In contrast to equities, FPIs displayed a clear preference for debt, investing a net Rs 59,000 crore in Indian debt in 2025. This was driven by India's inclusion in global bond indices, attractive yield differentials, and portfolio rebalancing amid volatile equity markets.

The phased inclusion of Indian government bonds under the Fully Accessible Route (FAR) in indices like the JP Morgan Global Emerging Markets Index has created consistent demand from passive funds, according to Srivastava.

Gupta from OmniScience Capital suggested that FPIs likely realized gains in the equity markets and shifted some of those funds into debt FAR to secure relatively higher interest rates.

"We are clearly entering a rate-cutting cycle, and Debt FAR allows for locking in higher interest rates with potential capital gains when cuts occur," he added.

Sectoral trends reflected these changes, with financial services and IT experiencing the most significant outflows due to concerns over US growth, a weak capital expenditure cycle, and pressure on net interest margins. Conversely, healthcare, utilities, and manufacturing attracted inflows driven by long-term themes such as infrastructure development and the PLI-led manufacturing initiative.

Overall, FPIs began 2025 on a weak note, withdrawing over Rs 78,000 crore in January due to rupee depreciation, rising US bond yields, and expectations of a lackluster earnings season. This trend continued until March, with a total of Rs 1.16 lakh crore withdrawn in the first quarter amid escalating global trade tensions.

Although FPIs returned with net investments of Rs 38,600 crore between April and June, this recovery was short-lived, with selling resuming from July to September. After a brief resurgence in October with a net investment of Rs 14,610 crore, FPIs reverted to being net sellers in November and December due to weak global indicators.