Rising Dollar and Weak Earnings Drive ₹64,000 Crore FPI Sell-Off!

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The Indian stock market has witnessed a significant outflow of funds from Foreign Portfolio Investors (FPI). As of January 2025, FPIs have withdrawn an alarming ₹64,156 crore from Indian equities, marking a concerning trend in the market. This ongoing disinvestment is a direct result of several macroeconomic factors, including the depreciating Indian Rupee, rising U.S. bond yields, and subpar quarterly results from key companies. In this article, we will delve into the reasons behind the massive FPI outflows, its impact on the Indian equity market, and what lies ahead for investors and traders alike.

Rising U.S. Bond Yields and Their Impact on FPI Investment

Another major driver behind the FPI outflows from Indian equities is the surge in U.S. bond yields. The increase in U.S. Treasury yields, particularly the 10-year bond yield, has made U.S. bonds more attractive to investors. As bond yields rise, they offer higher returns, making them a more appealing option compared to riskier assets such as equities.

The U.S. Federal Reserve’s hawkish stance on interest rates, aimed at combating inflation, has pushed up bond yields. This has resulted in a shift in investor preference towards U.S. bonds, further fueling the outflow of funds from emerging markets like India. As long as U.S. bond yields remain elevated, it is expected that FPIs will continue to favor safer investments, leading to sustained selling pressure on Indian stocks.

Investor Sentiment and the Impact of U.S. Policies

The shifting geopolitical landscape and uncertain policies of the U.S. government have also played a role in influencing FPI behavior. The unexpected moves by former U.S. President Donald Trump during his tenure had a ripple effect on global markets, causing foreign investors to adopt a more risk-averse approach.

Himanshu Srivastava, Joint Director and Research Manager at Morningstar Investment Advisors India, emphasized that these developments have led investors to take precautionary measures. The unpredictable nature of international policies and political risks has heightened uncertainty, prompting FPIs to move away from emerging markets like India, which are often seen as riskier compared to developed economies.

Sectoral Impact of FPI Selling: Financial Sector Takes the Hardest Hit

One of the key sectors affected by this FPI exodus is the Indian financial sector. The banking and financial services stocks have been under immense selling pressure as foreign investors have liquidated their positions in these companies. This is particularly evident in large-cap financial stocks, which have witnessed significant declines in their stock prices.

On the other hand, the information technology (IT) sector has seen some buying activity despite the overall bearish sentiment in the market. According to V.K. Vijaykumar, Chief Investment Strategist at Geojit Financial Services, the strengthening of the U.S. Dollar and the increase in U.S. bond yields have contributed to the increased attractiveness of IT stocks. These companies, which rely heavily on exports, are benefiting from the favorable exchange rate, which has led some FPIs to remain invested in this sector.

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