The Indian stock market has recently experienced a significant downturn, marked by a substantial sell-off from foreign institutional investors (FIIs). This blog post delves into the details of this market movement, its causes, and the factors that have helped cushion its impact.
Market Weakness and FII Sell-off
The Sensex and Nifty have both seen declines, with foreign investors continuously selling for five consecutive days, withdrawing approximately one billion dollars from the Indian market. This bearish outlook from FIIs is driven by anticipation of further market weakness and a potential recession. Technical analysts noted a critical breach as the Nifty fell below 25,000, signaling a potential for further decline.
Scale of FII Selling
In the last five days, FIIs have divested shares worth ₹11,690 crore, exceeding one billion dollars. July 17th alone saw a sell-off of ₹3,671 crore, making it the second-largest single-day sell-off in this period. The largest single-day sell-off occurred on July 11th, with ₹4,495 crore worth of shares sold .
Counterbalancing by Domestic Investors
Despite the aggressive selling by FIIs, domestic institutional investors (DIIs) have consistently been net buyers. Over the same five-day period, DIIs invested over ₹11,000 crore into the Indian market. This robust domestic buying has significantly offset the FII impact, preventing a more severe market decline.
Shifting FII Trend in July
A notable shift in FII behavior occurred in July, as they became net sellers after being net buyers for the preceding three months (April, May, June). June saw the strongest buying, with approximately ₹14,600 crore invested. This sudden reversal in July is particularly striking and a cause for concern.
Year-to-Date Outlook and Underperformance
From January to July 2025, foreign investors have sold approximately ₹900 crore worth of shares, reflecting a cautious stance due to recession fears. India has underperformed most other markets in July, with the Nifty dipping by 1.6%, primarily due to FII selling . The year’s pattern shows FIIs as net sellers in the first three months, followed by three months of buying, and then a return to net selling in July. The current trend suggests that FII selling is likely to persist .
FII Strategy: Short Positions and Valuation Concerns
Foreign investors are not only selling in the cash market but are also building up short positions in the derivatives market (F&O), indicating their expectation of further market decline . They believe the Indian market is currently overvalued compared to other global markets .
Citi Group’s Downgrade and Outlook
Citi Group, a prominent global brokerage, has downgraded India from “overweight” to “neutral.” An “overweight” rating suggests a higher allocation, while “neutral” indicates no particular focus . Citi’s rationale includes expensive valuations and a weak outlook for corporate earnings growth in India. Conversely, Citi is “overweight” on China, Korea, and the Philippines, anticipating better returns, improved earnings revisions, and attractive valuations in those markets. Citi highlights that India’s market is trading at a P/E of 23, making it expensive relative to its peers.
India’s Macro Story vs. Earnings Outlook
Despite market concerns, Citi Group acknowledges India’s robust macro story compared to its competitors. There is also potential for a trade agreement with the US. However, the market’s earnings growth outlook appears subdued, not necessarily poor, but not “exceptional” or “miraculous”.
Resilience of Indian Market
Historically, such a significant outflow of foreign capital would have severely impacted the Indian market. However, the consistent investments by domestic investors, particularly small investors through mutual fund SIPs, have provided substantial support to the market. This domestic strength has diminished the ability of “smart money” (foreign investors) to significantly destabilize the Indian market .