Foreign investors withdraw ₹87,300 crore from Indian equities in January; DIIs match outflows | Stock Market News

Indian Stock Market: Foreign portfolio investors (FPIs) maintained their bearish view on Indian markets in January, driven by modest Q3 earnings, rising US bond yields, strong US dollar, stretched valuations in small and mid-caps, and concerns over global liquidity tightening.

Additionally, US President Donald Trump’s trade policies have also prompted overseas investors to rebalance their portfolios. Further, the recovery in China’s stock market in 2025 has lured some FPIs back, given that Chinese equities are trading at significantly lower valuations compared to India.

Amid these developments, they have withdrawn ₹87,374 crore worth of Indian stocks through exchanges in January, which was the second biggest monthly withdrawal after October, when they sold ₹1.14 lakh worth of Indian stocks. 

FPIs remained net sellers in 20 out of 21 trading sessions during the month, with the largest single-day withdrawal recorded on January 14, when they pulled out ₹8,132 crore. 

As FPIs continue to pull funds from Indian stocks without any sign of slowing down, domestic institutions have stepped in to absorb the selling pressure, injecting billions into the market. They bought stocks worth ₹86,591 crore, nearly offsetting the FPI sell-off and preventing a sharp market decline.

Both Nifty 50 and Sensex have managed to end January with a drop of over 0.5%, but this was the fourth consecutive month of losses for the indices. This is also the first time in the last 23 years that the frontline indices have ended in the red for four consecutive months.

Mid- and small-cap stocks took a severe beating during the month, with the Nifty Small Cap 100 index tumbling 10%, which was the biggest monthly drop since February 2022, and the Nifty Midcap 100 index declining 6.10%. The weak earnings in the December quarter so far have raised valuation concerns on these counters, leading to a sharp sell-off.

Meanwhile, in the Union Budget 2025, the government has proposed an increase in the tax rate on long-term capital gains on FIIs.

Currently, under Section 115AD of the Income-Tax Act, Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors are taxed at 10% on long-term capital gains from the transfer of securities (excluding certain units covered under Section 115AB of the Income Tax Act).

This follows last year’s budget, which had already increased the LTCG tax on listed equity shares, equity-oriented mutual funds, and units of business trusts sold by FIIs to 12.5%.

Outflows set to continue amid strong US dollar

The US Dollar index jumped 1% in today’s session to 109.88 after Donald Trump announced sweeping tariffs on trading partners, including Canada, Mexico, and China. According to experts, the strong dollar will continue to weigh on FPI outflows, potentially leading to further capital outflows from emerging markets like India, increased currency volatility, and pressure on the rupee.

As part of his strategy to benefit American businesses and citizens, Trump announced on Saturday a 25% tariff on Canada and Mexico and a 10% tariff on Chinese imports. He is also reportedly considering imposing tariffs on European imports and has threatened to impose tariffs on other trading partners, including India.

Experts believe these tariffs could potentially ignite a global trade war and fuel inflation, which could possibly impact the global central banks’ rate-cut trajectory.

Puneet Sharma, CEO and Fund Manager at Whitespace Alpha, said, “Uncertainty surrounding President Donald Trump’s economic policies has cast a long shadow over global markets, and volatility is unlikely to subside anytime soon with Trump doubling down on America-first trade policies, tariff threats, and tax reforms. Rising protectionism, particularly in sectors like technology, manufacturing, and energy, could disrupt global supply chains, keeping emerging markets like India on edge.”

“Additionally, Trump’s aggressive fiscal stance—favouring tax cuts and heavy infrastructure spending—could fuel inflation, delaying potential Fed rate cuts and keeping US bond yields elevated, further tightening global liquidity,” he added.

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.