Why FIIs Are Selling Indian Stocks Despite 8% GDP Growth

The Indian markets are reaching new all-time highs and the GDP has risen to a six-quarter high, above the 8% mark. However, FIIs (Foreign Institutional Investors) continue to sell off their holdings of Indian stocks. There has been little change in the trend of FII investments. December has started with FIIs selling equities worth Rs 1,171 crore. In November, FIIs also ended as net sellers in equity. This marks the fifth consecutive month of net selling by FIIs. As a result, total outflows for the year 2025 have now surpassed Rs 2.96 lakh crore.

Ajay Bagga, market veteran, outlined the key responsible factors and said, "FPIs (Foreign Portfolio Investors) are 85% net short in the Indian futures markets and are net sellers in the cash market. This situation arises from five main reasons. New tax rules for FPI investments are stricter, making it less appealing for them. These changes have led to a perception that Indian markets are overvalued and lack the strength for earnings growth. Additionally, there are no AI-related investment opportunities, the currency is declining and the tax environment is not favorable. Overall, this makes the Indian market unattractive".

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Several factors are seen as possible causes for the ongoing outflow of investments by FIIs. Here are the five main reasons why FIIs are concerned about the Indian stock markets:

The Valuation of Indian Markets

The valuations of Indian markets remain higher than most EM (Emerging Markets), even after earlier corrections this year. While large-cap stock valuations have come down from their highs after Covid, they are still above historical averages. Similarly, small-cap valuations are also stretched. The price-to-earnings ratio is above the long-term average. Many experts believe that the high valuations of Indian equities, especially compared to other markets, could make them vulnerable to downturns and may affect foreign investment.

The Muted Capex

Investment circles are worried about reduced spending on capital projects (capex). The Central government’s capex dropped by about 28%YoY compared to last year in October. At the same time, current spending increased due to higher interest payments, though these were lower than last year. Meanwhile, direct tax collections also fell because of lower income and corporate tax revenues. Since GST (Goods and Services Tax) collections have decreased after rate cuts, Goldman Sachs thinks "the Central Government will try to meet its fiscal deficit target of 4.4% of GDP for FY26 by cutting spending, likely in capex, to balance out the shortfalls in income tax and GST.

Earnings Growth Momentum

One crucial issue is the weakness in earnings. Instead of improving as expected in Q2, earnings stayed low. Only 17% of companies reported higher earnings and more companies downgraded their earnings than upgraded, according to brokerage reports. Most brokerages predict that Nifty’s EPS (Earnings Per Share) growth for FY26 will be weak, but they see a chance for a stronger rebound in FY27. Favorable economic conditions, along with a recovery in consumption and normalization of rural demand, create a suitable environment for earnings to improve in the future. Many believe that earnings may pick up in FY27 and FY28. However, the earnings result for Q3 and Q4 of FY26 will be important in determining whether this trend continues.

Rupee at Fresh Low

The rupee has fallen to a record low of 89.54/$ due to strong demand for the dollar and uncertainty about US-India trade talks. Analysts and experts expect the rupee to stay under pressure because the imbalance between demand and supply for the US dollar is likely to continue. The Dollar Index has been above 99 and has increased by nearly 2% in the last three months, which is also affecting market sentiment.

Indo-US Trade Uncertainty

The last important concern is the ongoing trade talks between India and the US, as per the most recent official statement. On November 28, India's Commerce Secretary Rajesh Agrawal stated that "India hopes to reach a trade deal framework with the US this year". This deal is expected to address tariffs in a way that benefits Indian exporters. India & the US have been discussing these trade issues for a long time, but they have not yet reached a final agreement.

Most analysts believe that for a clear change in FII (Foreign Institutional Investor) sentiment, key factors to watch are earnings performance and company valuations. Additionally, the rising strength of the dollar has made Indian stocks less appealing compared to those in other emerging markets.

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