FII Selling Puzzle:Why Foreign Investors
Are Offloading Indian Stocks Despite
Robust 8.2% GDP Growth

India's GDP has increased to a six-quarter high, surpassing the 8% threshold, and the Indian markets are hitting new all-time highs. Nonetheless, foreign institutional investors, or FIIs, are selling their Indian stock holdings.

The trend of FII investments has not changed much. FIIs have sold stocks in the cash segment is more than Rs 10,400 crore so far in December 2025. FIIs concluded November as net sellers in equity as well. FIIs have been net selling for the past five straight months. Consequently, the overall outflows for 2025 have now exceeded Rs 3.00 lakh crore.

Data of FII selling in the Cash Segment in December 2025:

As per the data, "FPIs (Foreign Portfolio Investors) are 85% net short in the Indian futures markets and are net sellers in the cash market,". There are few basic reasons why this condition exists. FPI investments are less attractive due to stringent new tax regulations.

Due to these shifts, there is a belief that Indian markets are weak and overpriced. In addition, the currency is depreciating, there are no investment prospects in AI, and the tax circumstances is unfavourable. In general, this takes away from the appeal of the Indian market.

The continuous withdrawal of investments by FIIs is said to be caused by a number of factors. FIIs are worried about the Indian equity markets for the following primary reasons:

• The Valuation of Indian Markets

Despite earlier losses this year, the valuations of Indian equities are still higher than those of the majority of emerging countries.  Large-cap stock prices are still higher than historical averages even though they have decreased from their peaks following COVID.  Small-cap valuations are likewise stretched. 

The ratio of price to earnings is higher than the long-term average. Many experts think that Indian stocks' high valuations, particularly when compared to other markets, might make them susceptible to downturns and have an impact on international investment.

• The Muted Capital Expenditure

Investment circles are concerned about a decline in capital project (capex) spending. In October, the Central government's capital expenditures decreased by almost 28% year over year. Even though these were less than the previous year, higher interest payments at the same time led to a rise in current expenses. As a result of declining corporate and income tax revenues, direct tax collections also decreased.

Goldman Sachs believes that "the Central Government will try to meet its fiscal deficit target of 4.4% of GDP for FY26 by cutting spending, likely in capex to balance out the shortfalls in income tax and GST" because GST (Goods and Services Tax) receipts have declined following rate cuts.

• Earnings Growth Momentum 

The decline in earnings is one important problem.  Earnings in Q2 remained modest rather than rising as anticipated.  According to brokerage reports, only 17% of corporations reported greater earnings, and more companies downgraded than upgraded their earnings.  The majority of brokerages believe that Nifty's EPS (Earnings Per Share) growth in FY26 will be modest, but they see potential for a more robust recovery in FY27. 

A rise in consumption, normalisation of rural demand, and favourable economic conditions all contribute to a favourable environment for future earnings growth.  Many think earnings will increase in FY27 and FY28.  However, whether or not this trend continues will depend on the FY26 Q3 and Q4 financial results.

• Indian Rupee at Fresh Low

Due to high demand for the dollar and uncertainty surrounding US-India trade negotiations, the rupee has dropped to a historic low of 90/$.  Because the imbalance between supply and demand for the US dollar is likely to persist, analysts and experts predict that the rupee will continue to be under pressure. Market sentiment is also being impacted by the Dollar Index, which has been over 99 and has risen by almost 2% over the past three months.

• Indo-US Trade Uncertainty 

According to the latest official statement, the final significant issue is the continuing trade negotiations between the US and India.  "India hopes to reach a trade deal framework with the US this year," said Rajesh Agrawal, India's Commerce Secretary, on November 28.  It is anticipated that this agreement will benefit Indian exporters by addressing tariffs.  Although they have been debating these trade concerns for a while, India and the US have not yet come to a definitive agreement.

• Better Opportunities for FIIs:

The possibility of higher earnings from the Chinese market is one of the reasons for the FII's exit. In an effort to revive its underperforming economy and draw foreign investment back into its markets, China has recently implemented several stimulus measures, such as changing monetary policy and increasing government expenditure.

Conclusion:

The majority of analysts think that valuations and earnings performance are important indicators of a shift in FII (Foreign Institutional Investor) attitude. Furthermore, Indian stocks are now less desirable than those in other emerging economies due to the dollar's increasing strength.

Investors should keep an eye on the ongoing selling by FIIs. For now, DIIs have managed to support the sharp decline because of the high inflow and cash reserves they had until recently. However, if FIIs keep selling and DIIs cannot buy, we might witness an even sharper drop from the current levels. In addition to FII selling, other factors we have discussed above will also be important in determining the market direction.