Rising US yields, stock overvaluation, and rupee depreciation contribute to market volatility
Foreign Institutional Investors (FIIs) have been pivotal in shaping India’s equity markets, bringing in substantial capital and influencing market dynamics. However, recent trends indicate a significant withdrawal of FII investments, raising concerns about the stability and future trajectory of the Indian market.
Magnitude of Recent FII Sell-Offs
In January 2025, FIIs divested approximately $9 billion from Indian equities, marking the second-highest monthly outflow on record. The financial sector bore the brunt of this exodus, accounting for nearly a third of these sales. Indices such as the Nifty Financial Services and the Nifty 50 experienced declines of 1.2% and 0.6%, respectively.
This trend persisted into February, with FIIs offloading an additional ₹9,090 crore in the cash segment by the 7th of the month. Cumulatively, in 2025, FIIs have withdrawn ₹90,993 crore from Indian equities, underscoring the severity of the situation.
Factors Driving the FII Exodus
Several interrelated factors contribute to the current wave of FII sell-offs:
Strengthening U.S. Dollar and Rising Treasury Yields: The appreciation of the U.S. dollar, coupled with increasing U.S. Treasury yields, makes American assets more attractive, prompting FIIs to reallocate funds from emerging markets like India to the U.S.
Elevated Stock Valuations: Indian equities have been trading at high valuations, leading to concerns about potential overvaluation. This apprehension has resulted in profit-booking by foreign investors.
Depreciating Indian Rupee: The rupee’s decline to record lows exacerbates losses for FIIs when repatriating funds, further incentivizing the withdrawal of investments.
Global Economic Uncertainties: Trade tensions, particularly new U.S. tariffs on steel and aluminum imports, have heightened global economic uncertainties, leading FIIs to adopt a risk-averse stance.
Implications for the Indian Market
The sustained withdrawal of FII funds has several ramifications:
Market Liquidity: A significant FII sell-off reduces liquidity in the stock market, making it challenging for investors to execute large transactions without impacting stock prices.
Currency Depreciation: The outflow of foreign capital contributes to the weakening of the rupee, as evidenced by its fall to a new low of 87.95 per U.S. dollar. The Reserve Bank of India has had to intervene to stabilize the currency.
Investor Sentiment: Continuous FII selling can dampen domestic investor confidence, potentially leading to further market corrections.
Domestic Investors: A Buffer Against FII Outflows?
Despite the FII exodus, domestic investors, including retail participants and domestic institutional investors (DIIs), have provided some support to the market. Increased investments through Systematic Investment Plans (SIPs) have bolstered market resilience. However, the sustainability of this support is uncertain, especially given high market valuations and recent index declines.
The ongoing FII sell-off poses a significant concern for the Indian market, affecting liquidity, currency stability, and overall investor sentiment. While domestic investors have mitigated some of the adverse effects, the long-term implications of sustained foreign outflows necessitate close monitoring and strategic responses from policymakers and market participants.
