New Delhi: Foreign Portfolio Investors (FPIs) have continued to reduce their exposure to Indian equities, pulling out over Rs 30,000 crore in the first half of March 2025. This follows significant outflows in the previous months, including Rs 34,574 crore in February and Rs 78,027 crore in January. As a result, FPIs have withdrawn a total of Rs 1.42 lakh crore (USD 16.5 billion) from the Indian equity market in 2025 so far, according to data from the depositories.

This marks the 14th consecutive week of net outflows from the Indian stock market, reflecting growing investor caution. The ongoing pullback by FPIs is driven by a mix of global and domestic factors that are influencing foreign investment decisions.

Global Factors Driving FPI Outflows

A primary reason behind the outflows is the escalating global trade tensions, particularly with the uncertainty surrounding US trade policies under former President Donald Trump. This has sparked concerns of a potential tariff-induced recession that could weigh heavily on global markets. Himanshu Srivastava, Associate Director at Morningstar Investment, highlighted that these uncertainties have made investors more cautious, prompting FPIs to scale back their investments in emerging markets, including India.

Additionally, rising US bond yields and a stronger US dollar have made American assets more attractive to global investors. With the US offering higher returns on bonds and a stronger currency, many foreign investors are choosing to park their money in US assets rather than in emerging markets like India. This shift has contributed significantly to the outflows seen in 2025.

Another factor exacerbating the outflows is the depreciation of the Indian rupee. As the rupee weakens against the dollar, foreign investors find their returns in the Indian market being eroded, making Indian equities less attractive for investment.

Shifting Focus to Chinese Stocks

Moreover, V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted that many FPIs have been diverting their funds into Chinese stocks, which have been performing better compared to other emerging markets in 2025. Despite the challenges faced by the global economy, Chinese stocks have shown resilience, drawing more investment away from markets like India.

Vijayakumar also mentioned that while the decline in the US dollar index could limit the fund flows into the US, the uncertainty surrounding global trade wars might push investors toward safe-haven assets such as gold and the dollar. This shift towards safer assets further highlights the risk-averse stance that FPIs have adopted in the current climate.

Trends in Indian Debt Market

While FPIs have scaled back on their equity investments, they have made some allocations in India's debt markets. Data shows that FPIs invested Rs 7,355 crore in the debt general limit, although they withdrew Rs 325 crore from the debt voluntary retention route. This suggests a more cautious approach in the Indian debt market as well, with investors preferring safer and more predictable returns.

A Shift from Record Inflows in 2023

The current trend marks a stark contrast to 2023, when India saw Rs 1.71 lakh crore in net FPI inflows, fueled by optimism over India’s strong economic fundamentals and growth potential. This surge in foreign investments came after several years of robust economic performance, bolstering India’s position as a preferred investment destination.

However, in 2024, FPIs significantly reduced their investments, resulting in net inflows of just Rs 427 crore. This marked a sharp reversal from the previous year’s record inflows, largely due to global uncertainties and domestic economic challenges. In comparison, 2022 had seen a net outflow of Rs 1.21 lakh crore due to the aggressive interest rate hikes by central banks globally, which impacted riskier investments like emerging market equities.

A Cautious Outlook for Indian Equities

The foreign investor pullback from the Indian equity market reflects broader concerns about global trade tensions, US economic policies, and currency fluctuations. These factors are making Indian equities less attractive to FPIs, who are seeking safer investments in the current global environment. Despite the challenges, India's economic fundamentals remain strong, but foreign investors are taking a more cautious stance, awaiting greater stability before reinvesting heavily in Indian equities.

With FPI outflows continuing into 2025, the Indian market may face ongoing volatility unless global conditions stabilize. However, India’s economic prospects, including its growth potential and strong domestic market, continue to position the country as a key emerging market in the long term.