FPIs are coming back to Indian stock market after months of outflows. 5 key reasons behind the change in trend

Indian stock market: After taking billions out of Indian markets through exchanges, overseas investors shifted their stance on the world's fifth-largest market in March, slowing down their pace of selling and turning into net buyers. This helped the Indian stock market to take a breather after being put under pressure for months by sustained outflows.

Over the last three trading sessions, they remained net buyers, infusing ₹3,055 crore on Monday, ₹7,470 crore on Friday, and ₹3,239 crore on Thursday, taking the three-day cumulative inflows to ₹13,746 crore.

This strong buying momentum has brought the much-needed cheer to Indian markets, causing the Nifty 50 and Sensex to log over 7% gains in March so far, marking their biggest monthly gain since June 2024, and has also helped the indices turn green for CY25.

The broader market recovery has been even stronger, with the Nifty Midcap 100 index gaining 10% and the Nifty Smallcap 100 index rallying 11% so far this month. This rally has arrived at a crucial time, rekindling optimism among retail investors—one of the key drivers of the unprecedented surge in domestic equities since the Covid-19 pandemic.

Although FPIs have reversed their bearish sentiment, they remained net sellers in March. Between October and February, they withdrew over ₹3 lakh crore, causing the Nifty 50 and Sensex to drop 15% from their respective highs. The last time FPIs were net buyers was in September when they poured in ₹15,432 crore.

Why are FPIs returning to Dalal Street?

Rising concerns that the U.S. economy may slow down in the near term, driven by escalating trade tensions initiated by Donald Trump, have caused the U.S. Dollar Index to lose 6% of its value. Analysts believe this has limited capital inflows back into the U.S.

Additionally, the Federal Reserve last week maintained its projection for two rate cuts in 2025. Lower U.S. interest rates make emerging markets, such as India, more attractive for foreign investors.

Another major concern behind FPIs' massive selling in recent months has been expensive valuations, prompting them to shift their focus toward other emerging markets, such as China, where valuations were more reasonable compared to India.

However, the prolonged sell-off in domestic equities has brought valuations to more reasonable levels, renewing foreign investors' interest in local equities.

Harshal Dasani, Research Analyst at Invasset PMS, attributed the reversal in Foreign Portfolio Investors' (FPIs) selling trend in March 2025 to multiple factors, highlighting a meaningful shift in sentiment.

Appreciating Indian rupee: He pointed to the strengthening of the Indian rupee, which closed at 85.94 per US dollar on March 24, 2025, appreciating by 39 paise (1.2%) by mid-March. This, he noted, reduces currency risk and enhances returns for FPIs.

Drop in U.S. Dollar: Dasani also emphasised the softening of the US Dollar Index (DXY) from 110.4 in January to 104.1 in March, making emerging markets like India more attractive for foreign capital.

Attractive valuations: In addition, attractive valuations have played a role, with the Nifty 50’s P/E ratio moderating to 20.8 as of March 21, 2025, making Indian equities more compelling.

Softening U.S. bond yields: Harshal further pointed out that cooling US bond yields—with both 10-year and 20-year Treasury yields retreating from their January peaks—have diminished the appeal of US debt instruments, leading to increased liquidity flows into higher-growth markets.

Growing risk-on sentiment: A supportive global risk-on sentiment, driven by strong performances across Europe and China, has also encouraged FPIs to reallocate toward India, which continues to benefit from robust macroeconomic fundamentals and easing inflation. According to Dasani, these factors collectively indicate a strategic shift by FPIs rather than a short-term move.

Will the market rally hold?

Vinod Nair, Head of Research, Geojit Investments Limited, said, "The domestic market experienced a robust rally, spurred by value buying as valuations returned to long-term averages and early indications of earnings growth recovery emerged. Increased government spending and expected monetary easing are anticipated to boost optimism in rate-sensitive sectors such as banking, NBFCs, auto, consumer durables, and real estate, leading to potential outperformance. The sustainability of this trend will depend on upcoming PMI data, Q4 earnings results, and developments related to reciprocal US tariffs."

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.