Rs 35,000 crore FII selloff in August. Can GST reforms, tariff relief and a strong GDP print turn the tide?

Foreign institutional investors (FIIs) pulled out Rs 34,993 crore from Indian equities in August, their sharpest retreat this year, as US tariff shocks and weak June-quarter earnings weighed on sentiment. The outflows pushed year-to-date FII selling past Rs 1.3 lakh crore, raising concerns about India’s place in global portfolios, even as policy reforms and stronger-than-expected GDP data offer potential triggers for recovery.

“This comes on the back of total FII selling worth Rs 1,21,210 crore in 2024. The simple explanation for this massive selling is India’s relatively high valuations compared to other markets. FIIs are rotating capital to cheaper destinations,” said Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Vijayakumar noted that FIIs have not entirely turned away from India. “Despite heavy selling in the secondary market, FIIs have bought Rs 40,305 crore worth of equities through the primary market, where IPO valuations are perceived as fair. Sudden shifts in tariff policy and exchange rates are also influencing FII behaviour, and these factors are likely to remain volatile in the near term,” he added.

On August 29 alone, foreign institutional investors (FIIs) pulled out Rs 8,312.66 crore, while domestic institutional investors (DIIs) provided support as net buyers, investing Rs 11,487.64 crore.

Financials, IT lead sectoral outflows in H1 August

The selloff was concentrated in financial services, which saw Rs 13,471 crore in withdrawals during the first half of August. IT followed with Rs 6,380 crore in outflows, while oil, gas and consumable fuels lost Rs 4,091 crore in the first 15 days. Power and healthcare also saw significant exits, amounting to Rs 2,358 crore and Rs 2,095 crore respectively. Realty, FMCG, and consumer durables each faced selling of over Rs 1,000 crore.

FIIs offloaded Rs 20,976 crore in just the first two weeks of the month, extending their retreat from July after U.S. President Donald Trump stunned markets with a 50% tariff announcement. Weak earnings on the domestic front further compounded exit pressures.

India slips in EM rankings

Nomura reported that “71% of EM funds are underweight India as of end-July (vs 60% previously), making India the largest underweight market in EM investors’ holdings,” with allocations shifting to China, Hong Kong, and Korea.

BofA Securities noted that India has fallen to the “bottom of emerging market preferences,” citing Trump’s tariff shock, while contrasting India’s challenges with North Asian markets that are benefiting from the AI cycle and structural reforms.

GDP surprise adds resilience

India’s economy delivered an upside surprise in the June quarter, with GDP growth accelerating to 7.8% year-on-year—well above consensus estimates of 6.7% and higher than the 7.4% recorded in the previous quarter, BofA Securities said. Gross value added (GVA) growth stood at 7.6%, supported by strong performance in manufacturing and financial services.

BofA added that the strong print “has all but ruled out a rate cut in October,” although it maintained its FY26 GDP forecast at 6.5% amid global risks from tariffs and trade disruptions.

Outlook: Reforms as catalysts?

Jefferies said on August 13 that “FPI positioning is close to lows,” with allocations at “decadal lows.” The firm noted that robust domestic inflows offer “big downside protection and a sentiment booster,” though it warned that any rebound “may not sustain for long.”

Motilal Oswal pointed to Prime Minister Modi’s Independence Day pledge of GST rationalisation, the S&P rating upgrade, and potential tariff relief as possible triggers to “rekindle sentiment in the Indian equity market.”

Emkay Global called GST reforms a “growth-accretive, big-ticket reform” that could offset “near-term worries on weak growth and tepid earnings,” and potentially serve as a rerating catalyst to attract FIIs back as market confidence improves.

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