How India’s fading valuation premium could lure FPIs back -- expert decodes FPI selloff & future

The overseas investor selloff has turned into one of the defining stories of the Indian stock market this Samvat year. Foreign portfolio investors (FPIs) have pulled out nearly Rs 1.6 lakh crore from Indian equities since last Diwali, marking one of the sharpest outflows in recent years.

Data from NSDL shows FPIs were net sellers in seven of the past 11 months, driven by valuation concerns, global rate hikes, and shifting risk appetite. However, there are early signs that sentiment may be stabilising. So far in October, FPIs have turned modest net buyers of Rs 653 crore, after three straight months of selling.

What triggered the selloff

Indian equities have traded at steep premiums to their emerging-market peers, prompting global investors to rebalance portfolios toward cheaper markets such as China, Taiwan, South Korea, and Brazil. The Nifty 50 has remained largely flat over the last year, underperforming other asset classes like gold and Bitcoin.

According to Ross Maxwell, Global Strategy Lead at VT Markets, “This outflow was driven by overvaluation, global rate dynamics, and risk shifts. The US Fed’s ‘higher-for-longer’ stance and a strong dollar made Indian assets less appealing, especially with rupee depreciation adding currency risk.”

High crude oil prices and trade uncertainties further weighed on sentiment, given India’s dependence on oil imports. FPIs chose to lock in gains and redeploy funds into undervalued markets where earnings prospects looked stronger in the near term.

The tide may be turning

Despite the heavy exodus, recent data hints at a shift. October has seen the first positive FPI inflows in four months, aided by stabilising indices and improving macro indicators. A softer oil price has reduced inflation worries, while the IMF recently raised India’s growth forecast, reaffirming confidence in the country’s resilience.

Corporate earnings, led by financials, autos, capital goods, and IT, have also held steady. The market’s valuation premium has moderated, bringing India’s price-to-earnings multiple back in line with other emerging markets.

Domestic resilience

Even as FPIs turned cautious, domestic investors—mutual funds, pension funds, and retail participants—have acted as strong counterweights. Their consistent buying has kept the market from deeper declines, underlining India’s structural shift toward domestic-driven liquidity.

“While foreign investors may not drive the next rally, they will likely return as catalysts once US rates ease and the global risk environment stabilises,” Maxwell noted. “The next growth phase for Indian markets will be powered more by domestic strength than by foreign inflows.”

FPIs have also shown selective optimism through the primary market, investing ₹46,164 crore in 2025 so far, suggesting they are still betting on long-term India themes—just at more reasonable valuations.

The bottom line

Foreign portfolio investors injected ₹6,480 crore into Indian equities during October, halting a three-month streak of sustained selling. This marks a notable shift in FPI strategy, after outflows of Rs 23,885 crore in September, Rs 34,990 crore in August, and Rs 17,700 crore in July, according to depository data. Market observers say the renewed inflow could reinforce confidence in India’s equity markets, which have been marked by cautious sentiment amid global uncertainties and fluctuating valuations.

Several tailwinds — including stable economic growth, easing inflation, and robust domestic demand — have contributed to the positive turnaround in foreign investment flows.

Geojit Investments’ Chief Investment Strategist, V.K. Vijayakumar, noted that “the principal reason for this shift in FPIs’ strategy is the reduced valuation differential between India and other markets.” He added, “India’s underperformance over the past year has opened up prospects for improved relative performance.”

The latest inflows have also been linked to softening trade tensions between the US and India, boosting optimism that foreign capital could once again play a supportive role in India’s next market upcycle.