The Indian stock market entered a turbulent phase in August 2025 as foreign portfolio investors (FPIs) turned aggressive sellers. Large foreign investors pulled out nearly $2.66 billion from Indian equities during the month, marking the biggest outflow since February this year. The trigger was a mix of weak corporate earnings and the impact of new U.S. tariffs on Indian imports.
This wave of selling dragged down benchmark indices. On August 28, the Nifty 50 opened at around 24,665 but quickly slipped, closing lower by nearly 0.6% at 24,557. The Sensex fell about 0.65% to 80,254. The correction was broad-based across all sectors, though mid-cap and small-cap stocks took a harder hit than large caps.
In the first two weeks of August alone, FPIs had already sold Indian stocks worth around ₹20,974 crore (about $2.4 billion). This outflow was higher than the ₹17,741 crore withdrawn in the entire month of July. By the end of August, total sectoral selling had crossed ₹31,889 crore, with financial services and information technology stocks being the most affected.
Looking at the bigger picture, FPIs have sold about ₹1.16 lakh crore (over $13 billion) from Indian equities so far in 2025. This makes India the most underweight emerging market for global institutional investors, who have been moving more capital into China, Taiwan, and South Korea.
Amid heavy foreign selling, domestic institutional investors (DIIs) have stepped in to stabilize the market. On August 26, while FPIs sold shares worth ₹6,517 crore, DIIs purchased equities worth ₹7,060 crore. This was their largest single-day buying since early August.
The growing strength of domestic investors is now a key factor in cushioning the market. In the last 12 months, DIIs have pumped in around $80 billion, which is almost double the outflow by FPIs. In 2025 alone, DIIs have invested more than ₹4 lakh crore into secondary markets—the highest annual figure since 2007. This strong support shows the growing power of Indian mutual funds, insurance companies, pension funds, and retail investors who invest systematically through SIPs.
To understand whether this selling is alarming, it helps to put the numbers in context. From September 2024 to July 2025, FPIs had sold about $23 billion of Indian equities. However, this amount was only around 2.3% of their total holdings in India, which were valued at about $940 billion at the time. This shows that the selling is more of a profit-booking exercise than a panic exit.
Moreover, while FPIs have been reducing exposure in the secondary market, they remain highly active in the primary market. In fact, foreign anchor investments in Indian initial public offerings (IPOs) have surged by nearly 300% in FY25, touching ₹26,508 crore. This clearly signals that long-term faith in India’s growth story has not diminished.
In addition, a review by global consultancy EY highlighted that FPIs were overall net buyers in 2024, even if the amount was modest at about $50 million. Primary market inflows were strong enough to offset secondary market selling, suggesting that FPIs continue to look at India as a promising investment destination, even if short-term reallocations are taking place.
Beyond the flow of funds, India’s macroeconomic story remains solid. In June 2025, India officially became the fourth-largest economy in the world, overtaking Japan in terms of nominal GDP. Foreign direct investment (FDI) inflows have stayed strong across key sectors, while the country’s current account deficit has narrowed, providing further stability.
Policy initiatives are also expected to support markets. A major development is the upgrade of India’s sovereign credit rating by Standard & Poor’s, from BBB– to BBB. This signals improved confidence in India’s ability to meet debt obligations and could open the door for more foreign inflows. At the same time, proposed changes in the Goods and Services Tax (GST) slabs may reduce inflationary pressures and boost consumption during the upcoming festive season.
Another potential turning point could be the progress of trade negotiations with the United States. If punitive tariffs are rolled back or diluted, market sentiment is likely to improve quickly, leading to a rebound in FPI participation.
The big question for investors is whether the ongoing FPI selling represents a danger sign or a chance to buy. Several arguments suggest that this may actually be a favorable time for investors with a long-term perspective.
First, valuations in many parts of the market have cooled down after the recent correction. Large-cap stocks, which had become expensive earlier in the year, are now trading closer to historical averages. This makes them more attractive to both domestic and foreign investors looking for reasonable entry points.
Second, the selling by FPIs appears more like profit-taking after years of strong gains rather than a structural exit. With Indian equity markets hitting record highs earlier in 2025, foreign investors had accumulated significant profits. Redeploying some of this capital to other Asian markets is a normal rebalancing act, not necessarily a vote of no confidence in India.
Third, the strong presence of domestic institutions offers a cushion that did not exist in previous decades. Mutual fund inflows, SIP investments, and insurance company buying are helping absorb foreign outflows without triggering a deep crash. This creates a more balanced market structure, reducing dependence on volatile foreign flows.
Finally, the long-term structural story of India remains intact. Economic growth, demographic advantage, expanding digital adoption, infrastructure investment, and policy reforms continue to support an upward trajectory. The sharp rise in FPI participation in IPOs underlines the belief that India’s corporate earnings will grow strongly over time.
At the same time, risks remain. The U.S. tariffs on Indian imports are a direct threat to export-oriented sectors like IT and manufacturing. If trade tensions escalate, it could dampen earnings visibility and put further pressure on equities.
There is also the issue of global fund allocation. Large institutional investors are shifting money into markets like China, Taiwan, and South Korea, which are currently offering relatively attractive valuations. This trend may continue in the near term, limiting the pace of FPI returns to India.
Additionally, some key domestic sectors are facing challenges. Earnings growth in IT has slowed, FMCG companies are struggling with weak rural demand, and banks are grappling with pressure on margins. These weaknesses mean that a broad-based rally may take time to resume, even if the long-term outlook remains positive.
The heavy selling by FPIs in August 2025 has caused significant volatility in the Indian stock market, but the situation needs to be read carefully. While the headline numbers suggest large outflows, the broader picture indicates that this is part of a normal cycle of profit booking and global reallocation rather than a structural retreat.
Domestic investors have emerged as a powerful counterforce, helping stabilize the market during periods of foreign exits. Strong economic fundamentals, policy reforms, and rising retail participation are further reasons to remain optimistic. For long-term investors, the current weakness may well prove to be an opportunity rather than a threat.
In simple terms, the correction brought about by foreign selling could be a healthy pause in the market’s upward journey. Those who focus on India’s long-term growth story may view this as a chance to buy into quality companies at more reasonable valuations, while remaining cautious of near-term global risks.