FIIs dump Rs 60,000 crore of India's crown jewels in brutal 2-month rout. What’s wrong?

Foreign institutional investors (FIIs) have unleashed a savage selloff across India's most prized sectors, yanking out over Rs 60,000 crore from financial and IT stocks in just two months as doubts over earnings recovery and global headwinds trigger exodus.

NSDL data reveals FIIs dumped financial stocks worth Rs 5,900 crore in July, then accelerated the carnage with Rs 23,288 crore in August selloffs. IT stocks suffered a similar fate with Rs 19,901 crore outflows in July followed by another Rs 11,285 crore exodus in August.

The IT sector's pain reflects broader global challenges as "tech firms are facing a global slowdown," according to HSBC analysis. This has contributed to the overall earnings weakness plaguing Indian markets.

The financial sector's deeper wounds stem from domestic pressures as "banks face weak demand and a rise in credit costs," HSBC noted, making them particularly vulnerable to the current economic slowdown.

Overall, FIIs have been consistent net sellers in 2025 till date, with outflows exceeding Rs 1.4 lakh crore.

The selloff has spread beyond the main targets, with oil and gas, power, consumer durables, healthcare, realty and FMCG stocks also facing foreign fund exits last month.

Domestic brokerage Angel One's Aamar Deo Singh said we have been witnessing a strategic reallocation by FIIs, with net-selling in largecap and selectively increasing exposure to midcap and smallcap segment.

Indian equities have underperformed emerging markets by 24ppt since mid-September 2024 primarily due to earnings weakness. In the last one year, Sensex and Nifty have given negative returns.

“Tepid demand along with rising competition has put growth under pressure. Earnings estimates have seen sharp downgrades and foreign investors have trimmed their holdings in six out of the past 11 months. The primary reason for the underperformance of the market and foreign investor outflows in the past year is weak domestic growth. After a few stellar years, when EPS grew at an annualised rate of 25%, earnings growth has lost momentum, growing by only single digits for five straight quarters,” HSBC said.

Consensus estimates for 2025 put earnings growth at 11%. The global brokerage expects forecasts to settle at around 8-9% and warn that any recovery will be very gradual.

Goldman Sachs data reveals the extent of the retreat: "India's allocation in active mutual funds globally is near a 2-decade low. Global funds across EM/Asia/Global mandates underweight India by c.215bp on aggregate."

The selling pressure faces an additional headwind from record-high equity supply. "Selling by 'insider investors' in the secondary market is up as business owners sell stakes in their firms either through IPOs or follow-on issuances," HSBC noted, warning this poses risks "especially if these sales exceed the level of buying by local investors through, for example, Systematic Investment Plans (SIPs)."

Despite the carnage, some strategists remain optimistic about a potential reversal. Dr. VK Vijayakumar from Geojit Investments believes GST reforms and strong GDP growth can be an upward revision in the earnings growth for FY26 and FY27. “This has the potential to turn FIIs into buyers in India triggering a rally in the market. This is a likely scenario which can play out in a few weeks."

Morgan Stanley's Ridham Desai maintains long-term conviction: "India is likely to gain share in global output in the coming decades, driven by strong foundational factors, including robust population growth, a functioning democracy, macro stability-influenced policy, better infrastructure, a rising entrepreneurial class, and improving social outcomes."

However, he cautioned that "India's low beta implies outperformance in a global bear market but underperformance in a bull market – as we are currently seeing."

FII portfolio positioning is at its weakest since the data started in 2000, according to Morgan Stanley, while Goldman Sachs notes that despite recent increases in active EM fund exposure to India, the country "remains among the most underweight markets within EM funds at 280bp UW allocation vs. benchmark."

HSBC maintains a neutral stance on India in a regional context, warning that "downside risks arise from slowing global growth and worsening geopolitics" even as the structural India story remains intact.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)