Indian equities underperformed many global peers in late 2024 and early 2025, the rupee came under pressure, and mid- and small-cap stocks saw liquidity dry up. Analysts note that weak earnings seasons (Q2 and Q3 FY25 corporate results were softer than expected) combined with FII selling have weighed heavily on these higher-beta segments. Let’s look at what FIIs are doing at the moment.

Recent FII Trends - What Are FIIs Doing?

Foreign Institutional Investors (FIIs) have been net sellers in Indian equities since late September 2024, triggering a sharp market correction. Indian benchmark indices peaked in late September 2024 and the broader market suffered more than blue-chips – mid-cap indices fell ~16–20% and small-caps ~19–25% from their peaks, sharper drops than the ~11-14% correction in the Nifty.. Analysts attribute a large part of this decline to relentless FII selling – over ₹1 lakh crore of equities sold since Oct 2024 alone​. In January 2025, FIIs offloaded a staggering ₹78,000 crore (one of the highest monthly outflows ever), following an even larger ₹94,000 crore sell-off in October 2024​. By mid-February 2025, total FII outflows for calendar year 2025 had reached about ₹1.1 lakh crore.

​It is on pace to make FY25 the worst year on record for FII net withdrawals​ and potentially even surpassing FY22’s record FII withdrawal. This exodus reversed the prior year’s trend, when FIIs were net buyers (₹1.74 - 2.08 lakh crore inflows in FY24) amid bullish sentiment​.

The sell-off was especially severe in October 2024 and January 2025, which alone accounted for a large chunk of the withdrawals​. Even in February 2025, FIIs pulled out over ₹23,000 crore​, and roughly ₹20,000+ crore in March (early data suggest outflows continued, though at a slightly lower intensity)​.

DIIs Prop The Market - But For How Long?

Despite the heavy FII selling, domestic investors have largely buffered the market. Domestic institutional investors (DIIs) – including mutual funds and insurers – and retail investors poured money into equities at record levels, offsetting much of the foreign outflows. For example, in January 2025, DIIs nearly matched FIIs, buying about ₹86,000 crore against FIIs’ ₹87,000 crore sales​. By mid-February, DIIs had invested ₹1.2 lakh crore year-to-date, roughly neutralizing the ₹1.06 lakh crore withdrawn by FIIs in the same period​. This tug-of-war kept large-cap indices relatively resilient (down only ~3–4% by Feb) even as FIIs were aggressively selling​. It highlights strong domestic confidence in India’s markets, with local institutions and retail seeing the correction as an opportunity to “buy cheap” what FIIs sold​. Market sentiment among local investors remained bullish on India’s economic prospects, blunting the impact of foreign exits.

Surge in SIP Discontinuations & Record SIP Stoppage Ratio

The number of discontinued SIPs accounts surged to 54.70 lakh in February, with active accounts dropping to 44.56 lakh. This led to a record-high stoppage ratio of 122%, indicating that discontinued accounts are growing faster than new registrations.

SIP investments have seen significant growth over the last decade, with monthly inflows rising from Rs 8,513 crore in February 2020 to Rs 25,999 crore in February 2025. However, inflows have recently declined, hitting a three-month low in February, down from Rs 26,400 crore in January and Rs 26,459 crore in December. Other equity-linked funds saw steeper declines, with mid-cap and small-cap inflows plunging by 35% and 34%, respectively, amid a broader market downturn.

Data from AMFI shows that the SIP stoppage ratio has steadily risen, climbing from 83% in December to 109% in January and reaching 122% in February. This trend coincided with a decline in total industry AUM by 4.04% to Rs 64.53 trillion.

The spike in SIP discontinuations partly to regulatory clean-up measures mandated by SEBI and the seasonal dip often observed in February. Despite the decline, total SIP assets remain high at Rs 12.38 trillion, accounting for 19.6% of the industry AUM. Industry experts maintain that the trend is not alarming. Investors appear to be rotating between different scheme categories rather than exiting the market. The ease of setting up and modifying SIPs has enabled greater flexibility in portfolio management. While market volatility persists, steady SIP inflows around Rs 26,000 crore suggest that long-term investment sentiment remains intact.

A Broader Emerging Market Outflow Trend Amongst Emerging Markets

It is not just India that has suffered from negative foreign flows. Data shows almost all major emerging markets experienced FPI outflows in February and in the last 3 months. In February specifically India, Brazil, Indonesia, Malaysia, Philippines, South Korea, Taiwan, and Vietnam collectively witnessed significant capital flight, with India alone accounting for an outflow of $2,189 million. Thailand, interestingly, was the only exception, recording an inflow of $17 million. Analysts attribute these outflows to a stronger US dollar, driven by US President Donald Trump's protectionist policies. As a result, global capital has been reallocating towards markets perceived as more stable or undervalued in the short term, such as China.

Many overseas investors are currently underweight on India, citing expensive valuations amid a growth slowdown, and are in “wait and watch”. However, looking beyond the immediate term, there are expectations that FII sentiment could improve by mid 2025. Some strategists predict that foreign selling will stabilize or reverse in the next 3–6 months as conditions turn favorable​.

India’s solid economic fundamentals (strong domestic demand, digital transformation, infrastructure push) remain intact, and he anticipates FII flows returning within 3–6 months as these long-term drivers bolster earnings growth​. The FII sell-off should subside by Q2 2025, reasoning that Indian equity valuations will have moderated and earnings forecasts bottomed out by then​. A peak in U.S. interest rates and the dollar (expected later in 2025) could also ease pressure on emerging markets, potentially encouraging FIIs back into Indian stocks​. In summary, while no immediate turnaround is expected, the consensus is that FIIs may gradually return in the latter half of 2025 once valuations reset, corporate earnings improve, and global liquidity conditions turn benign​. Patience is urged in the interim, as foreign investors “will take their own sweet time” until macro conditions (like clarity on global trade/tariff issues and a weaker dollar) give them confidence to re-enter​.

Are FIIs Moving To China From India?

In the near term, most experts do not foresee a quick comeback of foreign investors. With Indian stocks still trading at relatively high valuations, analysts say incremental FII flows are likely to remain elsewhere (notably in China) in the short to medium term​. A stronger US dollar and higher US bond yields have made global investors cautious on emerging markets, adding to the headwinds.

MSCI India index performed exceptionally well between January 2024 and September 2024, even surpassing the MSCI China index from June to September. However, since October, the MSCI China index has surged ahead. This shift can be attributed to valuation discrepancies. While the Shanghai Shenzhen CSI 300 index is currently trading at a valuation multiple of 16.2x, in line with its 5-year and 10-year historical averages of 15.3x and 15.2x, the Nifty was trading at a relatively expensive valuation of 21.3x against its historical 5-year/10-year averages of 23.9x and 22.8x, respectively.

Indian Sectors Currently Attracting FII Investments

Despite broad-based selling, FIIs have shown interest in a few specific sectors and stocks even during this downturn. Most sectors saw net outflows, but data from late 2024 and early 2025 highlights some pockets of FII buying:

• Telecom: The telecom sector stood out with consistent FII inflows. In fact, telecom attracted the highest FII inflows for two consecutive fortnights in Feb 2025, totaling about ₹5,600 crore​. This was largely driven by a major stake sale in Bharti Airtel, one of India’s leading telecom companies, which FIIs enthusiastically participated in​. The Airtel deal boosted foreign investment in telecom and signaled confidence in India’s 5G and telecom growth story. The Starlink partnership with Jio & Airtel, has also reignited interest in the telecom sector.

• Information Technology (IT): After significant corrections in 2024, Indian IT stocks’ valuations became more reasonable. FIIs did engage in selective buying in the IT sector during this period​. Large-cap software exporters with steady cash flows likely benefited, as global investors looked for value in sectors aligned with worldwide demand.

• Chemicals: Specialty chemical companies – many of which benefit from China+1 supply chain shifts – also saw net FII buying. Industry data indicate that FIIs added positions in select chemical stocks, bucking the selling trend in other sectors​. Attractive valuations and robust export prospects may have drawn foreign investors to this space.

• Textiles: Another niche where FIIs were net buyers was textiles​. This could be due to government production-linked incentive (PLI) schemes and the global diversification of apparel sourcing. Some textile exporters gained FII interest as longer-term bets, even as the overall market was being sold off.

• Defensive Stocks: There are signs that both FIIs and domestic funds gravitated toward defensives like healthcare and consumer staples (FMCG) amid volatility. These sectors offer stable earnings and were bolstered by supportive budget measures (e.g. tax relief increasing disposable incomes)​. However, it’s worth noting that even FMCG faced net FII outflows in aggregate (over ₹6,900 crore sold in Feb) as part of the broad sell-off​. This suggests that while foreign investors held on to some blue-chip defensive names, they still trimmed exposure where valuations were deemed too rich.

Overall, FIIs have largely reduced positions across most sectors, preferring to take profits rather than make fresh investments. Heavy selling was recorded in financials (banks and NBFCs), consumer goods, capital goods, automobiles, and even oil & gas during Oct 2024 – Feb 2025​.

Notably, financial services and FMCG saw continuous outflows over multiple months (₹31,940 crore and ₹12,332 crore outflows respectively over four consecutive fortnights)​, reflecting FII unease with high valuations in these segments. The auto sector also witnessed sizable foreign selling (e.g. ₹3,279 crore outflow in just the latter half of Feb)​ as growth slowed. In contrast, the few sectors with inflows – telecom, and to a lesser extent IT, chemicals, textiles – underscore that FIIs are still willing to invest selectively in areas where they see value or specific catalysts. Going forward, as foreign investors inch back, sector rotation could favor value-oriented plays (e.g. telecom, industrials) and beneficiaries of India’s structural growth, while highly valued “new age” tech and pricey consumer stocks might continue to see limited FII appetite​.

Are FIIs Selling On The Great Indian Story?

Despite recent FII sell-offs in Indian equities, global investment executives remain optimistic about India's long-term investment potential. The sell-off has been largely attributed to high market valuations, but consistent taxation and regulatory policies, infrastructure investments, and improvements in manufacturing could bring foreign investments back. Foreign investors had collectively reduced exposure across both cyclical and consumption-driven sectors without much discrimination, as evidenced by concurrent sell-offs in capital goods, financials, FMCG, autos, and even traditionally “safe” sectors​. An “indiscriminate selling” mindset prevailed, partly due to passive index outflows and broad portfolio rebalancing away from India​.

FIIs have acknowledged that India’s recent market correction had made valuations more attractive than before, but many were waiting for clearer signs of an economic upturn – such as a pickup in consumer demand or private investment – before returning aggressively​. In other words, FIIs wanted confirmation that India’s growth trajectory is firmly back on track and that corporate earnings will accelerate, rather than simply buying the dip blindly. This cautious stance created a sentiment gap between foreign and domestic investors: while FIIs were in “risk-off” mode on India, domestic participants remained confident in India’s structural story and treated the correction as an opportunity.

Going forward, market sentiment is gradually shifting to a more balanced tone. The extreme FII pessimism has begun easing as Indian equity valuations have cooled off from peak levels. Market experts suggest that a period of consolidation and earnings-driven stock picking is ahead – which could entice FIIs back if India delivers on growth. Improved global liquidity (for instance, if the US Federal Reserve pauses or cuts rates later in 2025) would be a major catalyst, as would any peaking of the US dollar’s rally​.

In the meantime, investors should monitor key indicators: India’s GDP and earnings growth in upcoming quarters, the trajectory of US inflation and rates, and FII flows into competing markets like China​. A decisive rebound in corporate earnings or a meaningful correction in stock prices could “reset” valuations to levels that FIIs find compelling​. Until then, the consensus is that FIIs will remain selective – focusing on quality large-caps and value pockets – while India’s strong domestic investor base keeps the market anchored. The long-term outlook remains positive: once global uncertainties abate, India’s robust economy and reform-driven growth are expected to draw foreign capital again, potentially in a big way​. In summary, the current phase is one of FII caution and recalibration, but with the expectation that foreign investors will gradually return as India’s fundamentals reassert themselves