Foreign investors have been steadily withdrawing funds from the Indian equity market, pulling out approximately Rs 24,753 crore (about USD 2.8 billion) in the first week of March. This follows significant outflows of Rs 34,574 crore in February and Rs 78,027 crore in January, bringing the total outflow in 2025 to Rs 1.37 lakh crore, according to depository data.
This marks the 13th consecutive week of net withdrawals, with foreign portfolio investors selling off equity shares worth USD 17.1 billion since mid-December 2024. The continuous selling trend is largely attributed to both global and domestic factors influencing market sentiment.
A key driver of this shift has been the rising tensions in global trade, particularly due to the imposition of higher tariffs by the United States on several countries, including India, Mexico, Canada, and China. These trade restrictions have led to concerns among investors, affecting market dynamics.
On the domestic front, corporate earnings have failed to meet expectations, prompting cautious sentiment among foreign investors. The depreciation of the rupee has further diminished the appeal of Indian assets, as returns in foreign currency terms have been negatively impacted. Additionally, India’s tax structure on capital gains, with long-term gains taxed at 12.5 per cent and short-term gains at 20 per cent, makes alternative markets with lower tax rates more attractive to overseas investors.
There has also been a notable increase in interest in Chinese equities due to their attractive valuations and recent policy measures by the Chinese government to support large businesses. This has led to a strong rally in Chinese stocks, with the Hang Seng Index delivering a 23.48 per cent return year-to-date, in contrast to the 5 per cent decline in India’s Nifty. However, some market experts suggest this could be a short-term trend, as Chinese corporate earnings have remained weak for over a decade.
Another factor influencing global fund flows is the recent dip in the dollar index, which may slow investments into the US, causing investors to explore other opportunities. Amidst these uncertainties, foreign investors have shifted their focus toward domestic consumption-driven sectors such as financial services, telecommunications, hospitality, and aviation, while reducing exposure to industries linked to external markets.
Alongside equity outflows, foreign investors moved Rs 2,405 crore into the debt general limit category while withdrawing Rs 377 crore from the voluntary retention route for debt investments.
The cautious stance taken by foreign investors marks a significant shift from the previous year. In 2024, net inflows into Indian equities were minimal at Rs 427 crore, a stark contrast to the robust Rs 1.71 lakh crore inflows witnessed in 2023, which were driven by optimism surrounding India’s economic growth. This trend also follows the significant outflows of Rs 1.21 lakh crore recorded in 2022, a period that saw aggressive interest rate hikes by global central banks.
