FPIs Said Goodbye, Retail Kept Mum, DIIs Stayed Strong: India’s 2025 Market Story 02Jan2026
(The views expressed here are for information purposes only and should not be construed as a recommendation or investment advice. While the author is a CFA Charterholder with nearly 25 years of experience in financial markets, this content is intended to share general insights and does not constitute financial guidance. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)
FPI Flows and Market Impact
The conventional wisdom in India over the past few years has been that foreign portfolio investors (FPIs) are losing influence on domestic equities because domestic institutional investors (DIIs) have grown in size and market influence.
However, the experience in calendar year 2025 challenges that notion.
FPIs net sold Indian stocks worth Rs 1.66 lakh crore, a substantial outflow (in fact, this is the highest outflow in rupee terms, without adjusting for India's total market capitalisation which too has grown substantially).
The market narrative, including retail investor behavior, suggests that such FPI exits still carry significant weight.
NSE data till 30Nov2025 show retail investors themselves net sold shares worth Rs 1,000 crore (in the secondary market), which, although smaller, indicates sentiment contagion: FPI exits are likely influencing domestic investor psychology, causing even individual investors to retreat.
In fact, retail investors bought shares worth more than Rs 4.50 lakh crore between 2020 and 2024, as per NSE data.
As an aside, retail investors appear to have found better opportunities in gold, silver, primary market, unlisted shares, foreign stocks and crypto currencies. It's common knowledge investing is all about alternatives and your willingness to tag along.
For the first 11 months of 2025, DIIs invested Rs 7.09 lakh crores, which is the highest inflow in history, indicating they acted as a counterweight to FPIs.
One could also argue without this huge DII inflow, markets indeed would have delivered negative returns overall in 2025.
Narrative Forces Against Markets
Several negative factors compounded in 2025, creating strong headwinds for equities:
The 50% Trump tariffs imposed by the US triggered trade tensions, hurting investor confidence in Indian exports.
The rupee depreciated against major currencies, making foreign investors wary of currency risk.
Indian stocks were broadly considered overvalued by multiple measures, reducing the margin of safety for investment.
FPIs were consistent net sellers, exacerbating bearish sentiment throughout the year. Out of 249 trading days in Indian equity market in 2025, they sold on 170 days—nearly 7 out of 10 days—keeping pressure on markets.
Government and capital market regulator SEBI measures to curb speculation in futures & options further reduced leverage-driven liquidity.
These “forces against” combined created both actual and psychological pressures on the market.
Even with positive domestic fundamentals, the narrative-driven selling by FPIs and subsequent retail caution had an outsized impact.
Forces Supporting the Market
On the other hand, domestic fundamentals were more or less strong:
GST rate cuts encouraged consumption, supporting corporate revenues.
Income tax reductions for the middle class increased disposable incomes, boosting domestic demand.
RBI’s aggressive monetary easing, including a 125 basis points rate cut and liquidity injections via OMO purchases and USD INR swaps, should have supported equities.
Official GDP growth estimates exceeding 8 per cent indicated a robust economic backdrop.
These factors suggested that, in theory, the market could have absorbed external shocks if domestic investor confidence remained high.
Why Negative Forces Dominated
Despite favorable domestic policies, the negative factors prevailed. FPIs’ large-scale selling acted as a catalyst for a broader market downtrend.
Even strong GDP growth and monetary easing were insufficient to offset concerns about valuation, international trade risks and speculative constraints.
Retail investor behavior confirms this sentiment shift: domestic participants did not counterbalance FPI outflows strongly enough.
The market outcome—Indian equities performing poorly in CY 2025 versus global peers—highlights that global capital flows still matter significantly, especially when negative sentiment becomes self-reinforcing feedback loop.
Calendar year 2025 demonstrates that while DIIs and domestic factors provide structural support, FPIs remain influential, particularly when selling is large-scale and media narratives amplify the risk perception.
Research shows that FPI flows do affect Indian stock performance, but they often operate in combination with DII flows and market fundamentals.
In calm periods, domestic investors and fundamentals can dominate; in stress periods (for example, global selloffs), foreign flows tend to have stronger influence.
Domestic growth, policy support and liquidity measures create a floor, but they cannot fully neutralise negative global sentiment and valuation concerns. In practical terms, FPI behavior seems to be a significant indicator for market psychology in India.
2026 Market Outlook: Optimism sparked by weak sentiment
Weak sentiment can, at times, create opportunities because assets often fall below their fair value, allowing investors to buy at a discount. Extreme pessimism can signal that most bad news is already priced in, limiting further downside.
Even when prices drop, strong fundamentals like earnings and GDP growth remain intact, supporting potential recovery. Stabilising forces such as DIIs or policy measures can give cautious investors confidence in a rebound.
Any eventual win-win trade deal between India and the US and rupee appreciation could turn the sentiment for the better.
In this way, weak sentiment can paradoxically spark optimism among those focused on long-term value.
FPIs exited aggressively, retail remained hesitant, while DIIs were supportive.
Despite
strong domestic growth, liquidity and tax cuts, the market
underperformed due to global uncertainty and negative sentiment.
This sets the stage for why 2026 outlook cannot ignore both global and domestic factors.
Factors Likely to Influence 2026
1. FPI Flows
After heavy selling in 2025, FPIs may reassess India in 2026 depending on global risk sentiment, interest rates abroad and currency stability.
A weaker rupee or global volatility could trigger another wave of FPI caution. RBI forex intervention needs to be watched closely.
Conversely, attractive valuations after 2025 underperformance could lure some re-entry.
2. Domestic Institutional and Retail Sentiment
DIIs, having supported the market through 2025, may continue to provide stability, especially if policy remains favorable (equity mutual funds still hold significant cash in their portfolios).
Retail participation could pick up if market corrections create buying opportunities and confidence improves.
3. Macroeconomic and Policy Factors
GDP growth in 2025–26 is expected to remain robust (7–8% range), supporting corporate earnings -- though there appears to be some obvious disconnect between economic growth and corporate profits.
RBI policies: Continued accommodative rates and liquidity support may underpin equities, but any unexpected tightening could trigger volatility.
Government reforms or fiscal measures (GST, tax policies, infrastructure spending) could stimulate sectors differently, creating selective opportunities.
4. Global Headwinds
Trade tensions, US interest rate policies or geopolitical shocks could influence FPIs and broader market sentiment.
Global risk-off episodes often have a short-term but sharp impact on Indian equities. Any truce between Russia and Ukraine, brokered by the combined West, could boost sentiment for financial markets. And such a truce could act against gold / silver speculation tilting investors back to equities.
Likely Scenarios
Base Case: Stable domestic growth, moderate FPI inflows and markets recover gradually from 2025 weakness.
Optimistic Case: Global conditions improve, FPIs return, DIIs continue support and retail confidence rises may set the stage for market to rebound sharply.
Pessimistic Case: Global volatility persists, rupee weakens, FPIs continue cautious stance leading to domestic sentiment faltering and markets remaining lacklustre or range-bound.
Cautious optimism is warranted:
India’s economic fundamentals remain firm, but global sentiment and FPI flows could sway the market. As in 2025, DIIs are likely to provide stability, while retail and FPI behavior could shape the market’s short-term moves. Certain sectors—like consumption, defence, pharmaceuticals and technology may outperform even if broader indices remain volatile.
(This is just for educational purposes; and should not be construed as investment recommendation. Readers should consult their own financial advisers before considering any investments.)
- - -
----------------
Read more:
------------------------
CFA 10 Year Milestone Professional Learning Program 2025 Certificate of Achievement
CFA Charter credentials - CFA Member Profile
CFA New Badge
CFA Badge
Viewing Options for this blog in different formats:
Sidebar and so on
He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
X (Twitter) @vrk100
No comments:
Post a Comment