Foreign institutional investors (FIIs) have aggressively sold off Indian equities, pulling out nearly ₹2 lakh crore from six key sectors, signaling a significant shift in market sentiment. This exodus raises concerns about the sustained appeal of the Indian market as 2025 draws to a close.

The information technology (IT) sector has borne the brunt of this sell-off, with outflows reaching ₹79,155 crore. Other sectors significantly affected include fast-moving consumer goods (FMCG) with ₹32,361 crore, power at ₹25,887 crore, healthcare at ₹24,324 crore, consumer durables at ₹21,567 crore, and consumer services at ₹19,914 crore. Overall, FIIs have withdrawn ₹1.6 lakh crore from Indian equities in 2025, a stark reversal from previous trends.

According to ICICI Securities, FIIs have been net sellers of Indian equities, amounting to US$17.8 billion in CY25, as liquidity flowed into other global equity markets like China, Japan, Europe, and the US. This shift occurred as Indian markets delivered mediocre returns compared to global peers, which posted gains between 12% and 61%, while emerging markets yielded returns of around 23%.

The selling pressure has extended beyond the top six sectors, impacting realty with outflows of ₹12,364 crore, financial services with ₹10,894 crore, and autos with ₹9,242 crore. Only a few sectors experienced inflows, led by telecom at ₹47,109 crore, followed by oil and gas at ₹9,076 crore and services at ₹8,112 crore.

This FII exodus has several impacts on the Indian stock market:

• Decline in Stock Prices: The withdrawal of foreign capital leads to increased selling pressure, causing markets and indices like the Nifty and Sensex to fall.
• Rupee Depreciation: Increased dollar outflows weaken the rupee against the US dollar, though the Reserve Bank of India (RBI) may intervene to curb excessive volatility.
• Rise in Bond Yields: Government bond yields may spike as foreign investors sell Indian bonds, leading to higher government borrowing costs and potential rate hikes by the RBI.
• Tighter Liquidity: The exit of foreign money reduces liquidity in the system, making capital more scarce and expensive for Indian corporations and banks.
• Reduced IPO Funding: Startups and companies may receive less foreign funding for IPOs and expansions.
• Dampened Growth Prospects: Limited capital availability can negatively impact GDP growth, especially for domestic consumption.
• Higher Inflation: A weaker currency and costlier imports can increase inflationary pressures.
• Increased Volatility: High FII outflows lead to significant price swings due to heavy selling and sporadic buying.

Amish Shah, head of India research at Bank of America, remains optimistic about a potential reversal, citing expected Nifty returns of around 12% versus just 4% for the S\&P 500, and anticipated US Federal Reserve rate cuts, which have historically driven FII inflows.

The recent market activity highlights the divergence between FII and DII (Domestic Institutional Investors) positions. DIIs, including mutual funds and insurance companies, have often stepped in to cushion the selling pressure, stabilizing benchmark indices. This underscores the increasing strength of the domestic investor base and rising SIP inflows.