US-China trade war: Will FPIs return to Indian stock market amid global chaos?

Foreign portfolio investors (FPIs) might have turned their backs on the Indian stock market lately, but analysts are of the view that this trend is unlikely to sustain in the medium-to-long term as the tit-for-tat trade war between the world's two largest economies – the US and China – will make them return to India.

FPIs have pulled out nearly ₹32,000 crore from Indian equities so far in April, amid heightened global uncertainty triggered by the imposition of reciprocal tariffs by US President Donald Trump. While a 90-day exemption has been granted to several countries, the tariffs — amounting to 125% — remain in effect for China. In response, China has retaliated with an equivalent set of tariffs on US goods, further intensifying trade tensions.

FPI trend in 2025

The selling in April resumed after FPIs pumped ₹32,576 crore into Indian equities between March 20 and March 27, which helped narrow the total net outflow for March to ₹3,973 crore.

This comes after significant withdrawals in the preceding months, with February seeing an outflow of ₹34,574 crore and January recording an even steeper exit of ₹78,027 crore. Overall, in 2025, FPIs have sold Indian stocks worth ₹1,61,669 crore, as per NSDL data, largely due to concerns around stretched valuations and subdued corporate earnings.

Will FPIs return to India?

According to analysts, the FPI selloff is likely to taper off in the second half of the ongoing financial year.

"A clear pattern in FPI strategy will emerge only after the ongoing chaos dies down. In the medium term, FIIs are likely to turn buyers in India since both the US and China are heading for an inevitable slowdown as a result of the ongoing trade war," said Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited.

Analysts at Goldman Sachs forecast the US economy growing just 0.5% in 2025, and an elevated 45% chance of a recession in the next 12 months, according to a Bloomberg report.

Economists at Citigroup also sounded caution on the US economy, saying that pausing reciprocal tariffs excluding China does not mean the US economy has avoided a slowdown in growth and a rise in inflation.

Kranthi Bathini of Wealthmills Securities said that despite medium-term valuation challenges, long-only funds have continued to hold their positions in India. "The outflows we’ve seen from the Indian markets were largely driven by the so-called 'hot money' that came in over the last one to two years," Bathini opined.

Q4 results, monsoon, and then the next couple of quarterly results are extremely crucial for the market, according to him. "Once there’s some stability in the market, we can see a change in trend from the second half of FY26," sa

Vijaykumar added that a strong Indian economy and stability in earnings will bring FPIs back. "Even in an unfavourable global scenario, India can grow by 6% in FY 26. This, along with better earnings growth expected in FY 26, can attract FPI investments into India once the dust in the market settles down," he added.

India vs emerging markets

Not just India, other emerging markets too have been facing significant outflows. Redemptions from EMs began in October 2024, following Trump’s victory, driven by concerns over US tariffs.

“This trend of outflows persisted for about five months, ending around February 2025. However, a few weeks before the official tariff announcement on April 3rd, we observed some stabilization in flows, which reversed again after the event,” according to an analysis by Elara Securities.

It’s important to highlight that the "tariff trade" has been in play for the past six months and now appears to have run its course with the recent market capitulation, the brokerage said, adding that as such, further significant market damage from this narrative seems unlikely.

According to Bathini, in the emerging market space, India is better placed than its peers and is likely to corner a large chunk of inflows from FPIs. "Within the emerging market space, India looks very attractive at this point in time. India has an edge over others," said Bathini.

If you're wondering what gives India that edge, it’s the stability of earnings, the overall quality of companies, and the resilience of the economy, according to the expert.

"India is well-positioned to overcome challenges like global trade tensions and medium-term concerns. It has the strength to weather these out," he added.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.