Foreign investors are exhibiting increasing bearishness towards Indian stocks, driven by a confluence of factors including a weakening rupee, high market valuations, and the imposition of tariffs by the United States. This shift in sentiment has led to accelerated selling and the build-up of short positions in the derivatives market, signaling a risk-off approach to Indian equities.
The rupee's depreciation is a significant concern for foreign investors. A weakening rupee increases import costs, fuels inflation, and can potentially deplete India's foreign exchange reserves. The rupee's USD value peaked at Rs 87.9 on August 4, 2025, before settling at Rs 87.6 on August 8, 2025. This devaluation puts pressure on the Reserve Bank of India (RBI) to intervene in the forex market, potentially draining forex reserves if the RBI attempts to artificially maintain a high rupee value amidst drying USD inflows. Weaker foreign investments are likely to worsen the situation. While net Foreign Direct Investment (FDI) inflows turned positive in FY25, RBI data reveals a 97% drop to $353 million, a sharp contrast to the $10.1 billion in FY24, as existing investors book profits and repatriate their investments.
High tariffs imposed by the U.S. are further dampening investor sentiment. U.S. President Trump recently doubled tariffs on Indian exports to 50% in response to India's continued oil trade with Russia. These tariffs, which took effect in phases during August 2025, make Indian goods significantly more expensive in the U.S., potentially halving U.S. exports. Sectors heavily reliant on the U.S. market, such as textiles, gems and jewellery, shrimp, leather, chemicals, and auto ancillaries, are particularly vulnerable, which may experience lower valuations. Morgan Stanley said that Indian textile and apparel exporters are halting U.S. order manufacturing due to President Trump's tariff doubling to 50%, severely impacting their competitiveness against nations like Bangladesh and Vietnam.
Technically, the NIFTY faces stiff resistance at 25,200, and failure to close above this level could keep the trend sideways to bearish. Foreign Institutional Investors (FIIs) maintained their historically bearish stance in index futures, keeping the long-to-short ratio at a steep 8:92. The combined effect of these factors has created a challenging environment for the Indian stock market. The BSE Sensex fell 765.47 points, or 0.95%, to close at 79,857.79, while the NSE Nifty shed 232.85 points, or 0.95%, to trade at 24,363.30. Benchmarks are heading for a sixth straight weekly loss. The Nifty 50 has fallen nearly 4% in the last one month, primarily due to tariff-related concerns and is down over 7% from its peak of 26,277.35.
Despite the current pessimism, some analysts suggest that the long-term outlook for the Indian economy remains positive, particularly in sectors like IT, pharma, and electronics, which are less affected by the tariffs. Some experts believe that the market may see another 5% fall. A potential market dip could present a buying opportunity for long-term investors, leveraging India's resilient economy. It is important to note that the Indian economy is broad-based and has a strong domestic demand and manufacturing base, which means that the country's growth is not dependent on any single market or product.
