Why foreign investors are selling Indian equities in large numbers

The Indian equity market has started the new year on a rough note as the NIFTY50 and SENSEX indices have tumbled over 3% so far in January. Multiple factors like geopolitical concern, weak corporate earnings, delay in the US-India trade deal and new tariff threat from the US have contributed to a wide range sell-off in domestic markets.

Foreign institutional investors' (FIIs) sell-off has also made the Indian market sentiment weak. FIIs have been consistent sellers of Indian equities since July 2025, selling equities worth over ₹2.20 lakh crore. So far this month, FIIs have sold equities worth ₹36,591 crore till 22 January.

The growing concern over the FII sell-off

Foreign institutional investors (FIIs), who were once the backbone of India's stock market rally, have become cautious. In 2025, foreign investors were consistent net sellers in the cash segment in 8 out of the 12 months, recording their highest-ever equity selling, totalling $18.4 billion for the entire year. As a result, FIIs holding in NIFTY50 stocks slipped to a 13-year low of 24.1%. The FIIs sell-off has coincided with a steeper market decline.

The impact on the NIFTY50 has been clear, with the index falling month after month amid severe selling periods. The following table summarises monthly FII net selling in stocks and the accompanying NIFTY50 performance changes:

As witnessed in the above table, Foreign institutional investors (FIIs) have been consistent sellers in the Indian markets since July 2025, with a total sell-off of ₹2.20 lakh crore. Heavy outflow from FIIs coincided with a steeper market decline. For example, in July 2025, FIIs' sell-off was ₹47,667 crore, while the NIFTY50 index declined 2.9% that month. On the contrary, domestic institutional investors (DIIs) have consistently stepped in as strong buyers, providing crucial support to the markets. But the FIIs' sell-off has impacted the investors' sentiments overall.

Rupee depreciation lowers Dollar returns

One major concern for FIIs is the continued fall of the Indian rupee against the US dollar, which reduces their returns when converted back into dollars. In 2025, the Indian rupee dropped by 4.3%, ending near ₹90 per dollar by year's end and reaching an all-time low of ₹91.01 in December.

This pressure has increased due to India’s trade deficit as imports increased and exports remained flat. On the other hand, China recorded a trade surplus of $1.19 trillion while India continued to run deficits. The drop has been slowed by RBI interventions, but control is limited because China's $3.3 trillion in foreign exchange reserves exceed the $700 billion. As a result, FIIs face higher hedging costs when the rupee is volatile, which lowers net returns in US dollars. Hence leading to a widerange withdrawals from the domestic markets.

Superior returns in global markets

FIIs are shifting to more stable and expanding economies. Global stocks increased 21% in 2025 according to the MSCI All Country World Index, but non-US markets performed better, with the MSCI ex USA rising 29.2%. Tech industries like semiconductors and AI led to an 18% increase in China's CSI 300. While South Korea's Kospi gained 76% (its best year since 1999) and Japan's Nikkei 225 increased 26%, India's NIFTY50 only returned 10.5%. Following the tariffs, FIIs inflow were drawn to emerging markets like Brazil (39.4%).