Will the Indian stock market see increased FPI outflows after higher tariffs?

It appears that the sentiment of overseas investors continues to remain bearish on domestic equities, as they have been wielding their selling weapon aggressively in the Indian stock market, pulling out another ₹34,733 crore through exchanges so far in August after withdrawing ₹47,666 crore in July.

Higher tariffs on India, lofty valuations, and lack of earnings visibility are currently driving FPIs away from local equities, prompting them to look instead at other Asian markets where valuations appear more attractive compared to India.

FPIs have also been sellers in the bond market, though they continue to invest through the primary market/QIP route. This clearly suggests that they view Indian equities as more expensive than those in other emerging markets.

So far in 2025, FPI selling has crossed ₹1.60 lakh crore, bringing their shareholding in the Indian equity market to a record 15-year low. Despite their aggressive selling, the market has seen only a limited impact, thanks to robust buying from DIIs, largely led by mutual funds, which continue to pour significant funds into equities, offsetting the effect of FPI outflows.

With the additional 25% tariffs on India confirmed by the US, effective Wednesday, August 28, it remains to be seen whether the sell-off will accelerate further or whether FPIs will slow their selling spree, given the large amount of holdings already offloaded in the first eight months of 2025.

Amid sustained FPI outflows and heightened market volatility, Divam Sharma, co-founder and fund manager at Green Portfolio PMS, shares his views on whether foreign investor selling is likely to persist and how investors should navigate the current environment. Edited excerpts:

It is unlikely that the recent tariff increase will significantly speed up FPI outflows. In recent months, foreign investors have already trimmed their holdings, and we think the downside is mostly priced in. The markets are slowly realising that these actions are not a new shock but rather the new normal. Since the initial adjustment has already occurred, the incremental impact on businesses should be minimal even if tariffs increase further.

Additionally, geopolitical dynamics are shifting in a way that makes things clearer, which gives investors more confidence to recalibrate. As the market adapts to this situation, we anticipate that the outflow momentum will eventually slow and level out.

Favorite countries and industries with strong domestic demand actually still present alluring prospects. India, in particular, stands out as a long-term growth story, and we anticipate that capital will flow towards areas where opportunity clearly outweighs risk.

Apparel, auto components, gems and jewelry, chemicals, steel, and seafood are a few sectors that have become vulnerable to Trump’s additional tariff. The overall duty has now reached almost 50%. Readymade garments, which already face stiff competition from Vietnam and Bangladesh, now face taxes of 61%, higher than the latter’s 31%.

Global investors continue to find domestic-facing industries appealing due to India's underlying growth story and rising consumer demand, even though FPIs may reduce allocations to these export-oriented stocks. Retail, electronics, financial services, and fast-moving consumer goods stand to gain, particularly since India's GDP is expected to grow by more than 6% through 2026, making it the world's fastest-growing major economy.

It is anticipated that the upcoming holiday season will boost market resilience and stimulate consumption, attracting foreign direct investment to sectors that are protected from tariff shocks.

Moreover, ongoing reforms and digitalisation support India’s service sector, further stabilising confidence. In sum, while tariffs prompt sector-specific FPI rotation, India’s robust domestic demand and economic trajectory will keep global capital engaged in non-tariff-led growth stories.

Building on the observation that the FII:DII ratio has slipped below 1, domestic institutional flows and retail participation have become essential buffers against selling pressure from foreign portfolio investors due to tariff concerns.

The increase in DII ownership, now at 19.2% in the Nifty 500, reflects a new reality where mutual funds, supported by retail Systematic Investment Plans (SIPs) and insurance companies, have built significant equity stakes through steady, long-term inflows. This domestic confidence stabilises the markets, protecting them from sudden exits of foreign capital.

Furthermore, the combined share of DIIs, retail investors, and High Net Worth Individuals (HNIs) reached a record high of 27.1% as of March 2025, highlighting the strength of domestic demand. While FPIs may cut back on sectors hit by tariffs, DIIs usually focus on businesses driven by growth and consumption.

This growing domestic base, alongside India's strong economic growth and high consumer demand during the festive season, indicates that local inflows can effectively counteract foreign selling pressure and maintain market momentum in the near term.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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