Foreign Institutional Investors (FIIs) have been net sellers in the Indian stock market since late September 2024, triggering market corrections. Several factors have contributed to this outflow, impacting the Indian stock market. Some of the primary drivers include the H-1B visa fee hike, Trump's tariffs, stretched valuations, and weak corporate earnings.

H-1B Visa Fee Hike The United States has increased the H-1B visa application fee to $100,000. This visa is commonly used by technology companies to hire foreign workers. Indian tech professionals account for a significant portion of H-1B visas, with over 70% going to Indian nationals. The increased fee could raise costs for US clients and reduce the demand for Indian tech talent, affecting the revenue of major IT exporters like TCS, Infosys, and Wipro. While the overall impact may be moderate as the fees apply only to new applications, a constrained supply of skilled workers in the US could drive wages higher and squeeze margins. Crisil Intelligence estimates that the new visa fee could reduce Indian IT firms' operating margins by 10-20 basis points, with companies expected to pass on 30-70% of the cost to clients. Some experts believe the H-1B visa fee hike may encourage employers to recruit H-1B holders already in the U.S. who have been laid off, offering a cost-effective alternative to sponsoring new visas.

Trump's Tariffs The imposition of tariffs by the US, particularly by President Donald Trump, has also contributed to FII outflows. In early August 2025, the US imposed tariffs reaching 50% on Indian imports. This action followed continued purchases of Russian oil by India, leading to an additional 25% levy. These tariffs have affected sectors such as textiles, gems, jewellery, and pharmaceuticals. The tariffs have caused capital outflows and a potential 0.3-point drag on India's real GDP growth. The Indian stock market has been range-bound since the announcement of these tariffs. Moreover, the impact has extended to services sectors like IT and pharma. The threat of 100% tariffs on branded pharmaceutical imports by Trump has further dampened market sentiment, causing pharmaceutical stocks to decline.

Weak Earnings and Stretched Valuations Overall weak earnings growth for several quarters has also triggered foreign investors to sell off in the Indian equity market. This has created an earnings-valuation mismatch, prompting foreign investors to seek cheaper emerging markets. The Indian market was considered overvalued compared to other emerging economies. High inflation has further eroded purchasing power, making goods and services more expensive.

Other Influencing Factors Besides the factors mentioned above, other global and domestic factors have influenced FII outflows:

• Global Economic Trends: Global economic events, such as changes in interest rates and GDP growth trends in major economies, impact the Indian stock market. For example, when the U.S. Federal Reserve raises interest rates, foreign investors may withdraw funds from emerging markets like India to seek higher returns in the U.S.
• Geopolitical Tensions: Geopolitical tensions, such as wars and political instability, create uncertainty in markets. The Russia-Ukraine conflict, for instance, led to increased crude oil prices, affecting energy and transport industries in India.
• US Dollar Gains and Elevated Interest Rates: A strong US dollar and elevated interest rates in the US have also contributed to FII outflows. Elevated rates keep borrowing costs high while making US bonds and the dollar more attractive, triggering FII outflows from emerging markets like India.
• Premium Valuation: The Indian market's premium valuation compared to other emerging economies has been a factor. As global markets offer more attractive valuations, FIIs may shift their focus.
• China Stimulus: Stimulus measures in China, including easing monetary policies and boosting government spending, have made the Chinese market more attractive to global investment.

Impact and Way Forward FII outflows can lead to increased market volatility, downward pressure on stock prices, and currency depreciation. However, domestic institutional investors (DIIs) have played a crucial role in stabilizing the market by absorbing a large portion of the selling pressure. Despite short-term volatility, the Indian market's fundamentals remain solid. Investors are advised to stay informed, diversify portfolios, and adopt a long-term approach to navigate market volatility.