FPIs Pull Out $25 Billion From India: Why Foreign Investors Remain Uncertain
Foreign portfolio investors have returned to selling Indian equities after investing more than $5 billion over two months. High valuations, rising global yields, crude prices and concerns over growth are keeping them cautious.
Foreign investors and Indian equities have once again entered an uncertain phase. After investing more than $5 billion in Indian stocks over two months, foreign portfolio investors (FPIs) have turned sellers in September. They have withdrawn more than $1 billion so far this month, pushing their total outflow from Indian equities this year beyond $25 billion, according to NSDL data.
The latest selling comes despite some of the factors that had previously weighed on foreign investor sentiment showing signs of improvement. The global enthusiasm surrounding artificial intelligence has moderated, while India has continued to report strong economic growth and corporate earnings. A weaker US dollar could also ease pressure on the rupee and make Indian assets more attractive to overseas investors.
However, several concerns continue to keep FPIs cautious. Global bond yields have risen, reducing the relative appeal of emerging-market equities. Crude oil prices have also moved closer to $100 a barrel, creating concerns for India because of its heavy dependence on imported oil. However, much of the recent rise in crude prices has occurred only in the past few days, meaning it may not fully explain the latest round of FPI selling.
Analysts remain divided over India's investment outlook. Morgan Stanley continues to maintain a positive view of Indian equities, describing the country as being in a “multi-quarter growth upcycle”. Its strategists believe stronger investment and earnings could provide support to the market. The brokerage has also suggested that the recent moderation in valuations could be cyclical rather than a sign of a deeper structural weakness. It sees artificial intelligence as a potential long-term productivity driver for India.
Macquarie has taken a more cautious view. Global strategist Viktor Shvets has noted that India's economic and credit indicators have performed better than expected and that private-sector investment has strengthened. At the same time, he has pointed to persistent inflation and the potential long-term impact of artificial intelligence on India's large technology industry.
India's technology sector, valued at more than $325 billion, remains an important contributor to exports, employment and consumer demand. Shvets expects India's long-term real economic growth to slow to around 6%-6.5% unless higher government spending or productivity gains from AI provide additional momentum.
The availability of manufacturing jobs is another concern. A shortage of employment opportunities in the manufacturing sector could deepen economic and social divisions. Shvets expects earnings per share for the MSCI India Index to grow at a low double-digit pace from current levels, compared with expectations of around 17% growth for 2027.
Indian equities also remain relatively expensive compared with several other emerging markets. India's equity risk premium is estimated at around 4.5%, against roughly 6%-9% in a number of other emerging markets as well as Japan and China. Despite the valuation premium, Shvets believes India has better-than-average prospects and could remain comparatively insulated from some of the disruption caused by AI.
Valuations are also central to the more cautious assessment from Bloomberg Intelligence's Nitin Chanduka. Nearly $60 billion has exited Indian equities since September 2024, yet domestic benchmark indexes have remained relatively resilient compared with previous periods of heavy foreign selling.
The recovery, however, has struggled to sustain momentum. India remains among the emerging markets facing significant foreign selling, with financials, information technology, consumer staples, energy and automobile stocks recording the strongest FPI selling since September 2025.
The Nifty 50 has also remained below its 200-day moving average for 130 days, marking its longest stretch at that level in almost a decade. At the same time, valuations continue to pose a challenge. The median trailing price-to-earnings ratio for NSE 500 companies is around 33 times, still high compared with historical levels.
The financial sector provides another indication of why foreign investors remain hesitant. Financial stocks have traditionally been a major preference for FPIs, but India's financial sector has recovered more slowly than many global peers. That has made it harder for foreign investors to make a decisive return despite India's relatively strong economic growth outlook.
The foreign inflows recorded over the past two months have therefore been described as a cautious “tiptoe” into Indian markets. The latest reversal suggests that overseas investors remain unwilling to make a larger commitment.
For now, FPIs appear prepared to test Indian equities selectively, but high valuations, global yields, oil prices, sector-specific concerns and questions over long-term growth are preventing them from making a stronger return.
