Context:

As of November 4, 2025, foreign investors have sold ₹1.5 lakh crore of Indian stocks, marking the largest outflow in around 20 years.

What do you mean by Foreign Portfolio Investors?

Foreign Portfolio Investors (FPIs) are entities or individuals that invest in a country’s financial assets—such as stocks, bonds, and other marketable securities—without seeking direct control or ownership of businesses. Unlike Foreign Direct Investment (FDI), which involves long-term stakes and management participation in companies, FPIs are primarily focused on earning returns through capital gains, dividends, or interest income. 

Significance of Foreign Portfolio Investment (FPI):

Capital Formation and Market Liquidity: FPIs bring foreign capital into domestic financial markets, enhancing liquidity and depth. This makes markets more efficient, facilitates price discovery, and enables smoother functioning of secondary markets.

Indicator of Global Confidence: FPI inflows reflect international investor confidence in a country’s economic fundamentals, corporate governance, and policy stability. Conversely, sudden outflows signal perceived risks or vulnerabilities.

Impact on Exchange Rates and Monetary Policy: Large FPI inflows can strengthen the domestic currency, while outflows may trigger depreciation and affect inflation. Central banks often monitor FPIs closely to manage liquidity and maintain currency stability.

Facilitating Economic Growth: By channelling capital into equity and debt markets, FPIs support corporate funding and infrastructure development indirectly, complementing domestic savings and investment.

Influence on Corporate Governance and Transparency: FPIs, being global investors, often demand higher disclosure standards, better governance practices, and accountability from companies, thus contributing to improved market practices.

Current Status:

Annual Outflows (2024-25): Foreign Portfolio Investors (FPIs) recorded significant outflows of approximately US$14.6 billion, marking the second-highest annual outflow on record.

Current Year Trends (2025): By September 2025, FPIs have withdrawn around ₹1.58 lakh crore (~US$17.6 billion) from Indian equities, indicating continued selling pressure.

Long-Term Interest: Despite ongoing outflows, India has seen an increase in new FPI registrations, with 287 new FPIs registered in 2025 so far, reflecting sustained long-term investor interest in the Indian market.

Picture Courtesy: Reuters

Reasons behind FPI outflows in India:

• Valuation Concerns: Indian equities have often traded at higher price-to-earnings (PE) ratios compared to peers. Example: As of 2025, Indian stocks were trading around 22 times earnings, higher than long-term averages.

•  Rising interest rates in developed economies make safer assets like US bonds more attractive than emerging markets.  
• Geopolitical tensions or global uncertainty can trigger capital flight from riskier markets. The exit from China’s markets also initially benefited India, but that “China-to-India” reshoring effect has plateaued. 
• India faces challenges such as sluggish private investment, slower household income growth, and uneven credit expansion. These structural issues limit sustainable domestic demand, affecting investor confidence in long-term returns.  
• Slow pace of institutional reforms or regulatory uncertainty may deter foreign investors. World Bank reports indicate that without reforms, emerging economies like India risk slowing before reaching high-income status, known as the middle-income trap. 
• FPIs prefer markets with easy liquidity to enter and exit. Any perceived tightening of liquidity or market stress can trigger withdrawals. 

Impacts of FPI sell-offs on India:

• Equity Market Volatility: Significant FPI withdrawals trigger stock market declines and volatility, potentially eroding investor confidence across both foreign and domestic markets. 

• Debt Market Impact: Selling of government and corporate bonds leads to rising yields, increasing borrowing costs for both public and private sectors. 

• Currency and External Sector: Capital outflows weaken the rupee, increasing the cost of imports, widening the trade deficit, and adding pressure on foreign exchange reserves.
• Economic Growth Dynamics: Slower capital accumulation and constrained investment can dampen GDP growth, affect employment creation, and reduce overall economic dynamism. 

• Sectoral Confidence: Market-sensitive sectors such as IT, manufacturing, and infrastructure may see dampened investor sentiment and slower growth due to reduced portfolio inflows. 

• Global Risk Perception: Persistent outflows signal perceived vulnerabilities in India’s corporate performance, macroeconomic policies, or structural reforms, affecting long-term capital inflows. 

• Monetary Policy Challenges: The Reserve Bank of India may need to intervene to stabilize liquidity, manage currency fluctuations, or adjust interest rates, with implications for growth and inflation. 

• Employment and Income Effects: Lower investment and corporate stress can affect employment generation, household incomes, and consumption demand. 

What we can do next?

Interest Rate Adjustments: The Reserve Bank of India (RBI) can tweak policy rates to make Indian assets more attractive to foreign investors. Higher returns on government securities and bonds can reduce outflows.

Simplified Investment Rules: Streamlining registration, reporting, and repatriation norms for FPIs encourages confidence.

Gradual Liberalization: Controlled and phased capital account liberalization prevents sudden withdrawal shocks.

Deepening Domestic Markets: Expanding equity and bond markets improves liquidity and resilience, reducing vulnerability to large sell-offs.

Maintaining Inflation & Fiscal Discipline: Predictable macroeconomic policies reduce perceived risk and make India a safer investment destination.

Conclusion:

Foreign Portfolio Investors are crucial for India’s capital markets, providing liquidity and supporting growth, but their flows are volatile and sensitive to global and domestic factors. Recent sell-offs reflect concerns over corporate earnings, valuations, and macroeconomic stability. Strengthening market depth, corporate governance, and regulatory frameworks can stabilize inflows and build investor confidence. Balancing short-term market stability with long-term structural reforms is essential to sustain foreign investment and support India’s economic growth. 

Source: The Hindu