The FII Exit: A Quick Shift in Sentiment
For four straight weeks, Indian equities have been in retreat. The Nifty50 and Sensex have seen consistent declines, driven primarily by aggressive FII outflows. After investing over ₹24,000 crore in the Indian cash market between March and June 2025, FIIs have reversed course dramatically in July — pulling out more than ₹28,000 crore in just a few weeks.
According to Sudeep Shah, Head of Technical and Derivatives Research at SBI Securities, “This isn’t a mild correction. FII selling has turned sharp, and their long-short ratio in index futures has plunged from 36.4 to 14.83 in less than a month. This indicates a major uptick in short positions, pointing to deepening pessimism.”
Global Factors Clouding Investor Confidence
The reasons behind this shift are largely external. A stronger US dollar — which has appreciated by nearly 0.9% in July alone — is making Indian equities less appealing to foreign investors. Furthermore, uncertainty surrounding the India–US trade deal, especially with an August 1 deadline looming from the US side, is adding to the nervousness.
“There is no clarity on tariffs or digital trade frameworks. Naturally, this ambiguity is pushing FIIs to stay on the sidelines,” explains Shweta Rajani, Head of Mutual Funds at Anand Rathi Wealth Limited.
Adding fuel to the fire, the US 10-year Treasury yield continues to rise, making American bonds more attractive to global investors. This is leading to a global portfolio realignment — and India is feeling the heat.
Q1 Earnings: No Sparks Yet
Another factor weighing on the market is muted Q1 earnings from heavyweight sectors like IT and financials — areas where FIIs traditionally hold large positions.
Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, notes, “There haven’t been any strong earnings surprises in Q1 FY26 so far. This is adding to the lack of momentum, especially at a time when foreign investors are already cautious.”
A Tactical Pullback or Deeper Concern?
Interestingly, the high concentration of short positions by FIIs — over 80% in index futures — might not necessarily signal long-term bearishness.
“This could be a tactical hedge,” Rajani says. “Whenever FIIs have had such lopsided positions in the past, we’ve often seen a reversal. It’s part of the ebb and flow of market cycles.”
Domestic Strengths Acting as a Buffer
Despite the foreign selloff, India’s domestic fundamentals remain robust. GDP growth is holding steady at 6.5% for FY25 and projected at 6.6% for FY26 — keeping India at the forefront of global economic growth.
Consumer inflation (CPI) remains under control at 2.1%, far below the RBI’s target. Fiscal discipline is also evident with the FY25 deficit narrowing to 4.8% of GDP, thanks in part to a record ₹2.7 lakh crore dividend from the Reserve Bank of India.
Moreover, domestic institutional investors (DIIs) have stepped in to fill the gap. With ₹37,687 crore in DII inflows this month alone, they’re acting as a stabilizing force in turbulent times.
What Should Investors Do Now?
While the current volatility may feel unsettling, experts advise investors not to panic. The market is navigating short-term challenges, but the long-term outlook remains anchored by strong domestic macroeconomic indicators.
“These phases of correction are part of the market cycle,” says Rajani. “Investors should avoid knee-jerk reactions and remain focused on their long-term financial goals.”
Bottom Line:
The Indian stock market’s recent slide is largely driven by foreign selling due to global headwinds — not domestic weakness. With solid fundamentals, strong DII participation, and potential for recovery once global uncertainties settle, this may well be a temporary storm in a longer-term bull run.
Disclaimer: The views expressed in this article are based on expert commentary and market analysis. Investors are advised to consult with financial advisors before making investment decisions.