Foreign institutional investors (FIIs) have pulled out a staggering ₹27,000 crore from Indian equities over the past nine trading sessions, rattled by a combination of weak Q1 earnings, global trade uncertainty, and a sharp appreciation in the US dollar. The sell-off intensified on Thursday alone, with net FII outflows crossing ₹5,600 crore in a single day.
The sharp withdrawal has come amid mounting concerns over India’s growth outlook and weakening investor confidence. The ongoing Q1 earnings season has disappointed market expectations, prompting FIIs to aggressively trim exposure and build record short positions in index futures.
FII Positions Turn Aggressively Bearish
At the start of the August series, FIIs’ long-to-short ratio in index futures dropped to just 0.11 — the lowest since March 2023 — signalling a heavily oversold market. Nearly 90% of FII index futures positions are currently on the short side, surpassing the previous high of 89% seen during the January expiry.
The Nifty’s rollover for the July expiry also reflected caution, falling to 75.71% from 79.53% a month earlier. Analysts say the data points to growing bearish sentiment among foreign investors, triggered by disappointing corporate earnings and external macroeconomic pressures.
Earnings Season Weighs on Sentiment
India Inc’s first-quarter performance has been underwhelming. The Nifty IT index has declined by 10% over the past month, and the banking sector is showing signs of stagnation. According to an ET report, the country’s top nine private banks reported just 2.7% year-on-year growth, highlighting subdued credit demand and tepid economic momentum.
The broader market has responded accordingly, with many stocks reacting sharply to weak earnings, further eroding investor sentiment and strengthening bearish positions.
Dollar Surge Adds to the Pain
The strengthening of the US dollar has added fuel to the FII exodus. The dollar index — which measures the greenback’s strength against a basket of major currencies — surged 2.5% this week to cross the 100 mark, hitting a two-month high. This marks the dollar’s best weekly performance in nearly three years and makes emerging market assets, including Indian equities, relatively less attractive.
Trade Uncertainty Clouds Outlook
Adding to the unease are global trade concerns, with fresh tariff threats from the US casting doubt over India’s ability to maintain its strategic trade relationships. According to global brokerage CLSA, such uncertainty undermines India’s appeal as a safe-haven investment destination.
CLSA’s Vikash Jain noted that “this near-term uncertainty could further impact an already underperforming though expensive Indian equity market,” and raise doubts over India’s current trade advantages.
Domestic Institutions May Step In
Despite the gloom, domestic institutional investors (DIIs) are expected to provide some cushion. Market veteran Sunil Subramaniam observed that DIIs have ample liquidity and may view the ongoing correction as a buying opportunity.
“Such corrections, which are panicky, are ideal buying opportunities for domestic institutions,” he said, noting that the sell-off may also be influenced by relatively better valuations and growth outlook in China.
Subramaniam also highlighted that US interest rates remain elevated, with the Federal Reserve refraining from any dovish signals, adding further pressure on global liquidity flows.
Historical Patterns Offer Hope
Interestingly, market data shows that in the four previous instances since March 2020 when the FIIs’ long-to-short ratio fell to 0.15 or below, the Nifty gained an average of over 7% in the following series — suggesting potential for a short-covering rally.
Vikas Khemani of Carnelian Asset Management remained optimistic about long-term prospects, saying, “As the Fed rate starts coming down, you will see FIIs coming back in my opinion.”
Outlook: Short-Term Pain, Long-Term Watch
As markets digest the twin blows of global trade tensions and domestic earnings disappointment, the battle between foreign selling pressure and domestic buying appetite will shape the near-term direction. While the ₹27,000 crore exodus is unnerving, historical trends and strong domestic participation may help cushion the blow — unless broader global volatility deepens further.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Capital Mirror.)
