So far in 2025, FPI selling has crossed ₹1.60 lakh crore, bringing their shareholding in Indian equities to a 15-year low. Analysts believe the recent tariff hike is unlikely to significantly accelerate outflows, as much of the downside is already priced in.

Will the Indian stock market see increased FPI outflows after higher tariffs?

Foreign Investors' Retreat from Indian Equities: A Deeper Dive

Overseas investors have significantly reduced their holdings in the Indian stock market, pulling out ₹34,733 crore in August alone, following a ₹47,666 crore withdrawal in July. This bearish sentiment brings the total FPI outflow for 2025 to over ₹1.60 lakh crore, pushing FPI shareholding to a 15-year low.

Driving Forces Behind the Exodus:

Higher US Tariffs: The recently implemented 25% tariff increase on Indian goods has added to the uncertainty.
High Valuations: India's stock market valuations are perceived as relatively high compared to other Asian markets.
Earnings Visibility Concerns: Uncertainty surrounding future earnings is deterring foreign investment.

While FPIs have also reduced their bond market investments, they continue to participate through primary market offerings. This highlights a clear preference for other emerging markets perceived as more attractively priced.

A Balancing Act: Domestic Investors Step Up

Despite the significant FPI sell-off, the Indian market has shown resilience, largely due to robust buying from Domestic Institutional Investors (DIIs), particularly mutual funds. This counterbalance has mitigated the impact of FPI outflows.

Expert Insights: Navigating the Current Climate

Divam Sharma, co-founder and fund manager at Green Portfolio PMS, offers valuable insights:

Q: Will the recent tariff hike accelerate FPI outflows?

A: While the tariff increase is a factor, we believe the market has largely priced in the downside. The initial adjustment has occurred, and the incremental impact should be minimal. Geopolitical shifts are also providing greater clarity, boosting investor confidence. We anticipate a slowdown in outflow momentum.

Q: Which sectors are most vulnerable to higher tariffs? How will this shape FPI allocation?

A: Sectors like apparel, auto components, gems and jewelry, chemicals, steel, and seafood are particularly vulnerable, facing tariffs nearing 50%. Readymade garments are especially hard-hit. However, global investors remain interested in domestic-facing industries, particularly retail, electronics, financial services, and fast-moving consumer goods, given India's strong projected GDP growth exceeding 6% through 2026.

Q: Can domestic flows offset FPI outflows?

A: Absolutely. The FII:DII ratio has fallen below 1, demonstrating the growing significance of domestic institutional and retail participation. DIIs, especially mutual funds fueled by SIPs and insurance companies, have significantly increased their equity holdings. Their combined share, along with HNIs, reached a record high of 27.1% as of March 2025. This robust domestic base, coupled with India's strong economic fundamentals and upcoming festive season, will likely continue to counterbalance FPI selling pressure.

In conclusion: While sector-specific shifts are expected due to tariffs, India's robust domestic demand and economic growth trajectory suggest continued global capital engagement in non-tariff-driven sectors.