India records highest FPI outflows in Asia amid valuation concerns and scarred relations with US

FPIs (foreign portfolio investors) have been pulling back aggressively from Indian markets, with outflows reaching a staggering Rs 16,422 crore in the past week alone, marking the highest in Asia. This sustained sell-off is reflective of mounting concerns over India’s elevated market valuations, slowing earnings growth, and fresh policy measures introduced by the US government, which have collectively dented investor confidence.

The continued exodus of FPIs has been a significant factor behind the depreciation of the Indian rupee against the dollar, which has lost 3.5 per cent in value over the past year — a sharp contrast to the appreciation seen in other emerging market currencies.

According to Dr V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, India has witnessed a net FPI withdrawal of $21 billion in the last 12 months, the largest among emerging economies during this period.

"This FPI outflow also has largely contributed to the depreciation in INR of 3.5 per cent against the dollar. The elevated valuations in India vis a vis other markets and the tepid earnings growth are the principal reasons behind the FPI pull out," Dr Vijayakumar told the Economic Times.

India’s benchmark indices have borne the brunt of this sell-off, suffering their sharpest weekly decline in seven months. The broader market has lagged behind other emerging markets by nearly 26 per cent year-to-date in dollar terms, raising questions about the sustainability of India’s economic growth trajectory.

Trade tensions and market volatility

Market analysts point to a complex web of factors behind the outflows, ranging from global macroeconomic pressures and geopolitical uncertainties to domestic policy challenges.

One critical concern is the ongoing trade tensions between the US and India, particularly following the US administration’s decision to impose tariffs on certain Indian exports. These tariffs have not only impacted export-driven sectors but have also amplified apprehensions about India’s investment climate.

“The recent tariff measures introduced by the US government have added to investor anxiety, as they threaten to disrupt trade flows and dampen growth prospects for India’s key sectors,” Dr Vijayakumar said in his interview with the Economic Times.

This development has made foreign investors more cautious, prompting a reassessment of India’s risk-reward profile relative to other emerging markets.

Adding to the pressure is the subdued earnings growth reported by many Indian companies, which contrasts sharply with the high valuations the markets currently trade at. Such a mismatch creates uncertainty about future returns and discourages further FPI inflows.

Dr Vijayakumar also highlighted the pattern of FPI behaviour over 2025, noting that foreign investors were sellers in the first quarter, turned buyers in the second, only to resume selling in the third quarter.

“This seesaw movement reflects the prevailing uncertainty and volatility in investor sentiment,” he said, “with concerns over domestic and international policy developments continually shaping the flow of funds.”

The depreciation of the rupee relative to other emerging market currencies has compounded the problem, as currency risk has become a deterrent for foreign investors. While many emerging markets have managed to strengthen their currencies, India’s weakening rupee raises the cost of investment and erodes returns when converted back into foreign currencies.

Cascading effect of adverse undercurrents

The combination of these factors has led to a growing sense of unease about India’s economic resilience. Despite government efforts to attract foreign investment and boost growth, the persistent FPI outflows suggest deeper structural issues remain unresolved.

Some experts warn that if the trend continues, it could put further pressure on India’s currency and stock markets, making it more expensive for businesses to raise capital and dampening prospects for economic expansion.

That “foreign portfolio investors are voting with their feet” underscores the lack of confidence in India’s short- to medium-term outlook.

The current scenario also highlights the delicate balance India must maintain in navigating its domestic reforms while managing international relations, especially with key trade partners like the US. Failure to address these challenges effectively could have longer-term consequences for India’s position in the global economic order.

As foreign investors continue to reassess their allocations, India faces the risk of capital flight that could derail recent gains and stall progress on economic development.