Foreign Institutional Investors (FIIs) kicked off the year 2025 with a significant selloff of $2 billion in just seven days
As Indian households continue to invest their savings in stocks through demat accounts and mutual funds, foreign institutional investors (FIIs) are finding it easier to withdraw some funds. Leading up to the upcoming busy weeks, including the ongoing Q3 earnings season, Donald Trump’s inauguration on January 20, the Fed meeting outcome on January 31, and the Union Budget on February 1, foreigners have opted to play it safe by selling Indian stocks worth nearly $2 billion in the first 7 trading days of 2025.
While the strategy of buying on dips has proven successful for retail investors, the global appetite for Indian stocks appears to be diminishing due to narrowing earnings differentials and high valuation premiums. Global brokerage firm HSBC has downgraded India to neutral in 2025 and lowered the Sensex target to 85,990, citing a softening of profits and elevated valuations.
Here are 6 reasons why FIIs are choosing to sell Indian stocks:
1) Earnings Decline
After four years of strong double-digit growth, India Inc. has experienced a decline in earnings over the past two quarters. Q3 numbers are not expected to exceed expectations, with brokerages predicting single-digit full-year earnings growth for FY25.
2) Economic Weakness
The Indian government’s advance estimates for GDP in FY25 have confirmed a slowdown. Real GDP growth for FY25 is projected to decrease to 6.4% YoY from 8.2% in FY24, falling below the Ministry of Finance’s forecast of 6.5% and the RBI’s projection of 6.6%. This slowdown will impact consumer and business confidence, wage growth, corporate revenues, consumption, investment, credit demand, and the fiscal outlook, according to Rahul Bajoria of BofA Securities India.
3) Rupee Hits Record Low
The Indian rupee reached a historic low on Thursday, dropping to 85.93 against the dollar as the dollar index hovered around 109. The relationship between currency exchange rates and foreign outflows is complex, with each influencing the other.
Foreign Institutional Investor (FII) outflows contribute to the rupee’s depreciation by increasing the demand for dollars. However, a weaker rupee also raises currency risk for FIIs, potentially leading to further outflows.
4) Bond Yields Surge
The US Treasury’s benchmark 10-year yield surged to 4.73%, its highest level since April, driven by positive job numbers and strong performance in the services sector. Analysts predict that the Federal Reserve may maintain rates in January, strengthening the dollar and causing bond yields to rise further.
5) Tariff Concerns
The economic landscape in the US will be shaped by the consequences of President Trump’s policy changes once he assumes office on January 20th.
The extent of Trump’s trade restrictions following his inauguration could impact export-focused emerging markets like China. If the restrictions are less severe, it may attract inflows into countries like China, potentially causing India to underperform in a broader emerging market rally. Conversely, stricter trade policies could lead to a different outcome, according to CLSA.
5) Slow Rate Cut Cycle
The recent commentary from the US Federal Reserve has cast doubt on the possibility of significant rate cuts in the US in 2025. Minutes from the Fed’s December policy meeting, released on Wednesday, revealed officials’ concerns about President-elect Donald Trump’s proposed tariffs and immigration policies potentially prolonging the battle against inflation.
Currently, markets are only factoring in one 25-basis-point Fed rate cut in 2025.
6) Wall Street vs Dalal Street
Another perspective on the financial markets is that the US market is attracting a substantial amount of global capital, resulting in capital outflows from emerging markets like India.
Ruchir Sharma of Rockefeller International has highlighted the dominance of the US market, which is causing the weakening of national currencies in various countries as wealth is being absorbed by the US economy. Describing it as the “mother of all bubbles,” Sharma recently expressed his belief that the US’s control over global financial markets has reached unprecedented levels.
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.