FII selloff drains liquidity, SENSEX sheds 11,000 points in five months: SBI Research

Foreign institutional investors (FIIs) have continued their selling spree in Indian equity markets, pulling out a staggering ₹34,574 crore in February 2025 alone, the research arm of the country's largest bank, SBI Research, said.

The total FII outflows have gone up to ₹1.12 lakh crore in the first two months of 2025 and ₹2.12 lakh crore over the past five months, spanning from October 2024 to February 2025.

Despite domestic institutional investors (DIIs) stepping in with ₹3.3 lakh crore in investments, the BSE Sensex has taken a significant hit, shedding more than 11,000 points in the last five months, SBI Research noted.

The sharp downturn follows an exceptional 2023-24 period for equities, which had pushed valuations of key indices to 'rich' levels, triggering a much-anticipated mean reversion.

A key factor influencing the sustained FII outflows is the increasing valuation divergence between Indian equities and their Asian peers. Post-pandemic, India’s stock markets had commanded premium valuation multiples, leading global wealth managers to rebalance portfolios in favour of more attractively priced jurisdictions, SBI Research said.

However, India’s strong economic fundamentals, democratic stability, and renewed earnings growth prospects are expected to lure long-term investors back. Analysts believe that value stocks with strong fundamentals will be the primary beneficiaries once foreign funds resume inflows.

Meanwhile, SBI Research added that the Reserve Bank of India may need to inject an additional ₹1 lakh crore into the financial system by the end of March to maintain liquidity equilibrium.

The report appreciated the RBI’s proactive measures in managing liquidity but highlighted that a delicate mix of temporary and permanent liquidity infusion is still a work in progress.

It highlighted that despite the central bank’s efforts, systemic liquidity remains constrained due to tax outflows, capital market volatility, and forex interventions.