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August proved turbulent for Indian equity markets as foreign portfolio investors (FPIs) staged their sharpest exit in seven months, pulling out nearly $4 billion. The sell-off, triggered by a mix of global and domestic headwinds, marks a significant shift in investor sentiment and raises questions about India’s near-term market resilience. Despite strong domestic inflows, the scale of FPI withdrawals has cast a shadow over equity performance and currency stability.
Key highlights from the August exodus:
1. FPIs sold ₹34,993 crore ($3.99 billion) worth of Indian equities in August, the highest monthly outflow since January 2025
2. The rupee weakened further, breaching the 88 mark against the US dollar
3. Domestic institutional investors (DIIs) continued to provide counter-support, with sustained buying across sectors
4. SIP inflows rose 31 percent year-on-year, reaching ₹1.87 lakh crore in the first eight months of 2025
Global triggers behind the sell-off
The steep FPI outflows were largely driven by external pressures:
- The United States imposed punitive tariffs of up to 50 percent on Indian merchandise exports, denting trade sentiment and growth outlook
- Global investors shifted capital to cheaper markets like Taiwan, Japan, and South Korea, which saw inflows of $18.3 billion, $16.1 billion, and $4.5 billion respectively in July
- The US Federal Reserve’s hawkish tone and rising inflation metrics added to risk aversion in emerging markets
India’s relatively high valuations also played a role, prompting FPIs to rotate capital toward undervalued geographies. The combination of trade friction, currency depreciation, and earnings disappointment in key sectors created a perfect storm for foreign investors to exit.
Domestic resilience and counterflows
Despite the foreign flight, domestic investors stepped in with robust support:
- DIIs pumped in over ₹4 lakh crore into Indian equities in 2025, the highest inflow since 2007
- Systematic Investment Plans (SIPs) continued to gain traction, with July alone contributing ₹28,464 crore—the highest monthly tally on record
- Retail participation remained strong, especially in mid-cap and small-cap segments, helping cushion the broader market
This counter-buying by DIIs has been more aggressive than in past crises, including the 2008 global financial meltdown and the 2022 sell-off. It reflects growing confidence in India’s long-term growth story and the deepening maturity of domestic capital markets.
Sectoral impact and market performance
The FPI retreat hit large-cap stocks the hardest, particularly in export-oriented sectors like textiles, gems and jewellery, and auto components. These industries are most exposed to tariff shocks and currency volatility.
Corporate earnings for the June quarter also disappointed in several sectors, further dampening investor appetite. The Nifty 50 and Sensex posted flat to negative returns for August, underperforming regional peers.
Meanwhile, FPIs remained active in the primary market, investing ₹40,305 crore in IPOs where valuations were more attractive. This bifurcation between secondary and primary market behavior suggests that foreign investors are not abandoning India entirely but are becoming more selective.
Looking ahead
With cumulative FPI outflows in 2025 now exceeding ₹1.3 lakh crore, the road ahead remains bumpy. Key factors to watch include:
- The September GST Council meeting, which may offer indirect tax relief to boost consumption
- US inflation data and interest rate signals, which could influence global capital flows
- India’s export competitiveness and currency stability amid ongoing tariff pressures
While domestic investors continue to anchor the market, sustained foreign selling could cap upside potential in the near term. Policymakers and market participants will need to navigate this delicate balance between global volatility and local optimism.
Sources: Economic Times, Business Standard, Deccan Herald, Moneycontrol, MSN India.
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