Will FIIs return? Understanding the big sell-off in Indian stock markets

Indian stock markets have been under pressure in recent months, with foreign institutional investors (FIIs) selling aggressively. The rupee has weakened, mid- and small-cap stocks have lost liquidity, and earnings growth has disappointed. This has led to a sharp market correction, particularly in mid and small caps. But why are FIIs selling, and when can we expect them to return?

Why Are FIIs Selling?

Since September 2024, FIIs have been net sellers of Indian stocks, pulling out over ₹1 lakh crore between October 2024 and February 2025. Mid-cap stocks fell by 16–20 percent, small-cap stocks dropped by 19–25 percent, and Nifty stocks saw a decline of 11–14 percent.

The heaviest sales took place in October 2024 and January 2025. In October alone, FIIs withdrew ₹94,000 crore, while January saw an outflow of ₹78,000 crore. February also recorded significant selling at ₹23,000 crore, while early data suggests March will see over ₹20,000 crore in outflows.

This selling trend is making FY25 one of the worst years for FII withdrawals, even surpassing the previous record set in FY22. The following table shows the monthly FII net equity flows for 2025:

FII Net Equity Flows (Monthly in 2025)

At the yearly level, FIIs pulled out over $15.46 billion in 2025 so far, compared to an inflow of $21.43 billion in 2023 and an outflow of $17.02 billion in 2022.

Who Is Holding Up the Market?

Despite massive FII outflows, domestic institutional investors (DIIs) have helped support the market. DIIs have continued investing in Indian equities, absorbing much of the selling pressure. In January 2025, DIIs invested ₹86,000 crore, nearly matching FIIs' ₹87,000 crore in sales. By mid-February, DIIs had already invested ₹1.2 lakh crore in 2025, nearly offsetting the ₹1.06 lakh crore withdrawn by FIIs.

This domestic buying has helped keep large-cap stocks relatively stable, with only a 3–4 percent decline by February, even though FIIs were aggressively selling. Local investors remain optimistic about India’s long-term growth and see the correction as an opportunity to buy stocks at lower prices.

Record SIP Discontinuations – A Cause for Concern?

While DIIs have stepped in, another trend has emerged: a sharp rise in SIP discontinuations. In February 2025, 54.7 lakh SIP accounts were discontinued, bringing the active SIP count down to 44.56 lakh. The SIP stoppage ratio, which measures discontinued SIPs versus new registrations, reached a record 122 percent.

Although SIP inflows have grown in recent years, from ₹8,513 crore in February 2020 to ₹25,999 crore in February 2025, inflows have recently declined. February’s SIP inflows dropped to ₹25,999 crore from ₹26,400 crore in January and ₹26,459 crore in December.

Industry experts attribute this decline to a combination of market volatility, regulatory changes by SEBI, and seasonal factors. Despite the surge in stoppages, SIP assets under management remain high at ₹12.38 trillion, accounting for 19.6 percent of the total mutual fund industry AUM.

Are FIIs Moving to China?

Some analysts believe that FIIs are shifting funds to China, which currently has lower stock valuations. Between January and September 2024, the MSCI India index outperformed the MSCI China index. However, since October, the MSCI China index has surged ahead, driven by valuation differences.

India’s Nifty index is currently trading at a price-to-earnings multiple of 21.3x, while China’s CSI 300 index trades at a much lower 16.2x. Since Chinese stocks appear cheaper compared to their historical valuations, some FIIs are reallocating capital there instead of India.

Which Sectors Are FIIs Still Investing In?

Despite heavy selling across most of the Indian market, FIIs have shown interest in select sectors.

Telecom has attracted ₹5,600 crore in FII inflows in February 2025, largely due to Bharti Airtel’s stake sale and the increasing focus on India’s 5G expansion.

IT stocks saw some FII buying after a significant correction, as investors looked for value in large-cap software companies.

Specialty chemicals benefitted from the China+1 supply chain shift, drawing FII interest.

Textiles gained some attention due to production-linked incentive (PLI) schemes and global demand for Indian apparel.

Defensive sectors like FMCG and healthcare saw mixed reactions. While some FIIs bought into blue-chip defensive stocks, overall FII outflows from FMCG still amounted to ₹6,900 crore in February.

On the other hand, sectors like banking, financial services, consumer goods, and automobiles faced the highest FII outflows. Financial stocks saw a four-month outflow of ₹31,940 crore, while FMCG companies lost ₹12,332 crore in FII investments.

When Will FIIs Return?

Right now, FIIs are in a "wait and watch" mode. Most foreign investors want to see clearer signs of an economic recovery before they return aggressively. There are three key factors that could bring them back:

Lower valuations in Indian stocks – FIIs may wait until market prices become more attractive.

Stronger earnings growth – Once corporate earnings show a clear recovery, FIIs may increase their positions again.

A peak in US interest rates – If the US Federal Reserve stops raising rates or cuts them later in 2025, global liquidity could improve, making India a more attractive investment destination.

Final Thoughts

Many analysts believe that FII selling could stabilize by mid-2025. Once Indian stock valuations moderate and corporate earnings bottom out, FIIs may start returning. Additionally, if US interest rates peak and the dollar weakens, capital could flow back into emerging markets like India.

For now, patience is required. Foreign investors are being cautious and will likely take their time before re-entering Indian markets in a big way. While FIIs may not rush back immediately, the long-term fundamentals of the Indian economy remain strong. When global uncertainties settle, foreign capital is expected to return, potentially in significant volumes.

(The author is co-founder and Executive Director, Prime Wealth Finserv)

Disclaimer: 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.