FIIs on a selling spree: What's triggering the carnage on Dalal Street in 2025

Foreign Portfolio Investors (FPIs) are on a selling spree this year in the Indian equity market. Sky-high valuation of stocks (midcaps and small caps), slowing of economic growth and subdued Q3 earnings have made foreign investors jittery in the Indian market. Add to that the recent announcements on tariffs by US President Donald Trump, the market which was witnessing profit-booking from record highs of September has now come under huge selling pressure amid subdued Q3 earnings. 

"The basic reason for this underperformance is the sharp slowdown in corporate earnings this year. Q3 results indicate only around 7% earnings growth. The fact is that a modest single digit earnings growth doesn’t deserve high valuations. This is the basic reason behind the relentless FII selling which has impacted the market. Appreciating dollars aggravated the problem," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services. 

Expressing hope of recovery in the market, Vijayakumar said, "Only indications of an earnings recovery and declining dollar can reverse the weakening market trend. This may happen soon. India’s macros are strong and a growth and earnings recovery are on the cards. Inflation in the US is likely to rise, thanks to the Trump tariffs, and the Fed is likely to respond hawkishly to that pulling the US markets and dollar down. This will happen, but we don’t know when."

A crash in indices such as Nifty Midcap 100 and Nifty Smallcap 100 signal the underlying negative sentiment in the market. 

Both indices are down by up to 20% in less than 5 months. This underperformance has left investors guessing if the bottom of crash has arrived or is there more pain ahead.  

FIIs have withdrawn Rs 22,929 crore worth of shares in February. Add to that, outflows worth Rs 87,374 crore in January, taking their year-to-date (YTD) outflows to  Rs 1.10 lakh crore.

The equity market is in a strong correction, with Sensex plunging 3,000 pts in nine straight sessions. If this downtrend continues, the Indian indices could enter bear market. 

A rise in US bond yields has also attracted FIIs to that country.
 
Vipul Bhowar, Senior Director - Listed Investments, Waterfield Advisors said, "Recent shifts in global policies, especially those emerging from the U.S., are invoking a sense of uncertainty among Foreign Institutional Investors (FIIs), which in turn is reshaping their investment strategies in dynamic markets like India. The allure of US assets has intensified, driven by rising bond yields that have made these investments seem more secure. This has led many FIIs to pivot away from Indian and other emerging market stocks."

"With prices soaring, many are reassessing their positions, reluctant to dive into a market that appears overheated and potentially risky. This combination of factors creates a complex landscape where the once-vibrant interest in Indian equities is now laced with hesitation and caution," added Bhowar.