Foreign Portfolio Investors (FPIs) have kicked off December with a significant wave of selling, withdrawing a net Rs 11,820 crore from Indian equities in the first week of the month. This marks a sharp acceleration in the pace of outflows, renewing concerns about foreign capital flight from Indian markets.
Rupee Depreciation and Global Trends Drive Sell-Off
Analysts point to the steep decline of the Indian rupee as a primary catalyst for the renewed selling pressure. The rupee has depreciated by nearly 5% this year, eroding the value of foreign investments and making FPIs risk-averse. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, noted that FPIs typically pull funds during such episodes of currency depreciation, a trend that is playing out once again.
This retreat also coincides with global year-end portfolio realignments, a routine December exercise where overseas funds often rebalance their holdings, triggering selling in emerging markets like India. Vaqarjaved Khan, Senior Fundamental Analyst at Angel One, confirmed that this seasonal trend has added to the pressure. He also highlighted that delays in concluding the India-US trade deal have further dented international investor sentiment.
A Volatile Year for Foreign Investment
The latest withdrawals continue a pattern of volatility seen throughout 2025. After three consecutive months of heavy selling between July and September—Rs 17,700 crore, Rs 34,990 crore, and Rs 23,885 crore respectively—FPIs briefly turned buyers in October, infusing Rs 14,610 crore. However, the pressure returned in November with a net outflow of Rs 3,765 crore, setting the stage for December's intensified selling.
Data from NSDL shows that these latest withdrawals push the total equity outflows for 2025 to a staggering Rs 1.55 lakh crore. In the debt segment, the picture was mixed: FPIs deployed Rs 250 crore under the general limit but withdrew Rs 69 crore under the voluntary retention route in the same week.
Domestic Investors Step In, RBI Rate Cut Provides Brief Respite
Despite the foreign exodus, domestic institutional investors (DIIs) have been swift to provide a counterbalance. DIIs purchased equities worth Rs 19,783 crore during the same period, effectively neutralizing the FPI sell-off. This strong domestic inflow is backed by confidence in India's economic growth and optimism about corporate earnings.
A notable turning point occurred on 5 December, when the Reserve Bank of India (RBI) delivered a surprise 25-basis point rate cut. On that day, FPI activity briefly flipped, resulting in net positive inflows of Rs 642 crore. This came after FPIs had sold close to Rs 13,000 crore by 4 December. Khan pointed out that the RBI not only reduced rates but also raised its FY26 growth guidance to 7.3% while cutting its CPI forecast, creating a positive environment for equities.
What Lies Ahead for the Markets?
Market attention is now shifting to the global monetary backdrop. The CME Fed Watch Tool signals an expected 25 bps rate cut by the US Federal Reserve next week, a move that typically boosts risk assets across global markets. Analysts suggest India could stand to gain from such a shift. However, Khan cautioned that the absence of a concluded India-US trade deal may continue to cast a shadow of uncertainty over foreign investment flows.
The tug-of-war between foreign outflows and robust domestic buying is likely to define market sentiment in the coming weeks, with currency stability and global cues playing pivotal roles.
