Decoding the Current Market Situation: FII Outflows & Market Impact
The Indian stock market has experienced significant volatility over the past few months, with the Nifty 50 and Sensex seeing a sharp decline of nearly 15% from their peak in late September 2024. This downturn has raised concerns among investors, particularly due to substantial Foreign Institutional Investor (FII) outflows exceeding ₹1.12 lakh crore in the first two months of 2025.
Why Are FIIs Selling?
Understanding the reasons behind FII outflows can provide clarity on market trends and future opportunities.
1. Higher Returns in the U.S.
- U.S. government bonds have been offering attractive yields of around 4.75%, making them a safer and more lucrative option for global investors.
- A strong U.S. dollar further boosts returns for foreign investors in U.S. assets.
- Indian equity earnings yield has been comparatively lower, making the market less attractive.
2. High Valuation in India & Weak Rupee
- Indian stocks had reached expensive valuations, reducing the attractiveness for FIIs.
- The rupee depreciating to 84-85 per U.S. dollar has further impacted foreign investors’ returns.
- Post-tax returns in India were not as favourable compared to other global opportunities.
3. U.S. Stock Market Outperformance
- Over the last five years, the S&P 500 has delivered a significantly higher CAGR return in dollar terms compared to India’s Nifty 50.
- Naturally, capital has followed higher returns, leading to an outflow from emerging markets like India.
4. Impact of MSCI Emerging Market Index Rebalancing
- More than 65% of FII investments in India come through passive MSCI index funds, with a limited portion through India-dedicated funds.
- MSCI Emerging Market Index has underperformed compared to global indices, leading to portfolio adjustments and FIIs pulling funds out of India.
- Fund Category Breakdown (FPI Investments)
| Fund Category | Percentage |
| 🟢 non-dedicated active funds | 65.6% |
| 🔵 Sovereign wealth funds | 16.8% |
| 🟡 India dedicated active funds | 7.7% |
| 🟠 non-dedicated passive funds | 6.7% |
| 🔴 India dedicated passive funds | 3.2% |
- Get Less and lost more
- India’s MSCI Index Share Growth:
- Started at around 8.1% in early 2020.
- Has now increased to 18.4% as of 2024.
- China’s MSCI Index Share Decline:
- Peaked at 43.2% in early 2021.
- Has dropped to 27.5% by 2024.
- Impact of Foreign Institutional Investors (FII) Selling:
- When FII participation was higher, India’s share was relatively lower (~8%).
- As FIIs reduced their exposure, India’s share has increased significantly (18%), meaning India is now more exposed to FII movements.
Interpretation:
- India received less allocation earlier but is now more impacted by global outflows due to its rising share in the index.
- A higher weight in the MSCI index means greater sensitivity to global investor sentiment and FII actions.
Performance of MSCI Indices and India (Nifty 500 TRI $)
| Index | 3 Yr (%) | 5 Yr (%) | 10 Yr (%) |
| MSCI Emerging Markets | -0.7 | 3.0 | 3.8 (Lowest) |
| MSCI ACWI | 8.4 | 11.0 | 9.7 |
| MSCI World | 9.5 | 12.1 | 10.5 |
| India – Nifty 500 TRI ($) | 8.7 | 13.8 | 9.2 |
Observation:
- Short-term market corrections due to FII outflows are common but are often followed by strong recoveries over 1-3 years.
- Domestic Institutional Investors (DIIs) and retail investors play a crucial role in stabilizing the market.
Signs of a Potential Market Recovery
While the short-term outlook remains cautious, there are positive indicators that could drive a market recovery:
✅ U.S. bond yields cooling down – If yields drop below 3.5-4%, FIIs may reconsider Indian equities.
✅ Indian stock valuations have become more attractive after the correction.
✅ Nasdaq down ~8% in just one week, indicating a shift in global investment patterns.
✅ India’s GDP growth remains strong, which could bring FIIs back by mid-to-late 2025.
Long-Term Perspective
- The rupee has depreciated ~3% annually over the last 20 years, yet the Nifty 50 TRI has delivered an impressive 14.07% annualized return.
- History suggests that Indian markets tend to rebound strongly post-FII sell-offs.
Market Impact of FII Outflows
| Year | FII Net Outflow (₹ Crore) | Market Impact | 1-Year Return | 2-Year Return | 3-Year Return |
| 2008 | -47,706 | Global financial crisis, Sensex fell ~50% | +76% | +121% | +155% |
| 2020 | -61,973 | COVID-19 crash, Nifty fell ~39% in March 2020 | +70% | +110% | +150% |
| 2022 | -1,20,000 | FII selling on rate hikes, inflation fears | +20% | +40% | +65% |
| 2025 | -1,12,000+ | Market declined ~13% from 2024 peak | To be determined | To be determined | To be determined |
Source: Bloomberg, Jefferies, SEBI Reports
Final Takeaway: Stay Focused on Long-Term Investing
The current market scenario is a testing time for investors, but history shows that patience and discipline in investing lead to wealth creation. Instead of reacting to short-term volatility, it is best to focus on long-term growth potential and systematic investment strategies.
Disclaimer: This content is for educational purposes only. Consult your financial advisor before making any investment or financial decisions.
