Why do FPIs keep selling?

Source: The post “Why do FPIs keep selling?” has been created, based on “Why do FPIs keep selling?” published in “Business Standard” on 14th April 2026.

UPSC Syllabus: GS Paper-3- Economy

Context: Foreign Portfolio Investors (FPIs) have withdrawn more than $45 billion since October 2024, and their ownership in Indian equities has fallen to a 15-year low. The reasons are largely structural, valuation-based, and global portfolio allocation-driven.

The reason behind FPIs continuing to sell Indian equities

1. High valuation premium of Indian markets

1. FPIs believe that Indian equity markets continue to trade at nearly a 50 percent premium compared to emerging market averages.
2. Investors question why they should invest in India at high valuation multiples with moderate earnings growth of 10–15 percent.
3. The valuation compression since 2024 indicates declining investor confidence in future growth expectations.

2. Availability of alternative investment destinations globally

1. Earlier, India was seen as the most attractive emerging market investment destination.
2. However, investors are now reallocating funds toward markets such as China, South Korea, Taiwan, and Brazil.
3. These markets currently offer lower valuations and stronger sectoral earnings prospects, especially in the technology and manufacturing sectors.

3. Revival of investment attractiveness in China

1. Global investors earlier avoided China due to geopolitical risks and regulatory uncertainty.
2. However, renewed policy stability and leadership in sectors such as electric vehicles, renewables, robotics, and artificial intelligence have improved investor confidence.
3. As a result, portfolio flows have partially shifted back toward China.

4. Concerns regarding moderate earnings growth in India

1. Many investors believe that India’s corporate earnings growth is structurally limited to 10–15 percent annually.
2. Major sectors such as IT services, private banking, consumer staples, and pharmaceuticals are not showing strong acceleration in earnings growth.
3. Investors are therefore questioning the sustainability of India’s earlier “high growth premium”.

5. Limited presence in sunrise technology sectors

1. Investors perceive that India does not yet dominate any major global sunrise sector such as semiconductors, advanced artificial intelligence, or robotics.
2. Even traditional strengths such as IT services face disruption risks from artificial intelligence automation.
3. This weakens India’s long-term innovation narrative in global portfolios.

6. Slower-than-expected progress in manufacturing expansion

1. Global investors expected India to benefit strongly from the China-plus-one strategy.
2. However, manufacturing inflows from multinational corporations have grown more slowly than expected.
3. As a result, foreign direct investment flows have remained relatively stagnant.

7. Regulatory and ease-of-doing-business concerns

1. Investors continue to perceive India as a complex regulatory environment with tax uncertainties.
2. These concerns become more important when returns moderate.
3. FPIs, therefore, prefer markets with simpler regulatory systems.

8. Artificial intelligence risks to India’s service-led growth model

1. India’s competitive advantage has historically been based on skilled white-collar labour.
2. Artificial intelligence threatens the billable-hours model of IT services exports.
3. This creates uncertainty regarding long-term earnings sustainability.

9. Relative underperformance versus emerging markets

1. Indian equity markets have underperformed emerging market indices by nearly 5,000 basis points.
2. Such relative underperformance encourages global investors to rebalance portfolios toward better-performing regions.

10. Portfolio rebalancing after earlier overweight positions

1. India earlier represented a large share of emerging market allocations because investors had limited alternatives.
2. As other emerging markets improved their attractiveness, investors reduced their overweight exposure to India.
3. This adjustment led to sustained FPI outflows.

Reason behind domestic markets remaining stable despite FPI selling

1. Strong participation from domestic institutional investors has supported market stability.
2. Rising retail investor participation through mutual funds and SIPs has offset foreign selling pressures.
3. India’s macroeconomic stability continues to provide a cushion against volatility.

Way forward to restore FPI confidence

1. Strengthening the innovation ecosystem

1. India should increase investment in research and development and advanced technology sectors.
2. Policy support for semiconductor manufacturing and AI industries should be expanded.

2. Accelerating manufacturing competitiveness

1. Faster implementation of Production Linked Incentive (PLI) schemes can attract multinational companies.
2. Infrastructure improvements should reduce logistics costs.

3. Improving ease of doing business

1. Simplifying taxation systems and regulatory compliance will improve investor sentiment.
2. Faster dispute resolution mechanisms can enhance confidence.

4. Expanding capital market depth

1. Encouraging the listing of new-age technology companies can diversify market composition.
2. Deeper corporate bond markets can strengthen financial stability.

5. Maintaining macroeconomic stability: Sustained GDP growth, fiscal discipline, and inflation control remain essential for restoring investor confidence.

Conclusion: FPI selling from India is largely driven by valuation concerns, global portfolio reallocation, moderate earnings expectations, and technology-sector competitiveness issues. However, strong domestic participation and India’s long-term structural growth potential suggest that the current negative sentiment may be cyclical rather than permanent.

Question: Why have Foreign Portfolio Investors (FPIs) been reducing their investments in India despite strong domestic flows? Examine the reasons and suggest measures to restore investor confidence.

Source: Business Standards