FPI selloff may worsen as Trump ups India tariffs pressure

Analysts have largely attributed the selloff to the trade uncertainty triggered by Donald Trump's tariff-related policies

The ongoing foreign portfolio investor (FPI) selloff in Indian markets may deepen further after the US President Donald Trump escalated tariff measures against India, which is already witnessing the highest outflows among emerging markets (EM).

 

According to Antique Stock Broking, India saw the highest FPI outflows among select EM, with $10.3 billion sold as of July-end. In the last 13 trading sessions alone, global funds have offloaded nearly ₹40,000 crore worth of shares, according to NSE data.

 

Analysts have largely attributed this to the tariff uncertainty triggered by Donald Trump's tariff-related policies. On Wednesday, Trump doubled India tariffs to 50 per cent on its purchases of Russian oil.

   

That apart, valuations of the Indian markets (Nifty 50) at 22.3x one-year forward earnings amid a tepid June 2025 quarter (Q1-FY25) earnings season and developments regarding Jane Street, they believe, have dented FII sentiment towards India in the last few weeks.  That said, the only silver lining, analysts feel, as regards FII flows to the Indian markets is an interest rate cut by the US Federal Reserve (US Fed) and a relative valuation comfort in case corporate earnings back home improve over the next few quarters.

 

While long-term capital remains committed to India, given the structural strengths, FPI may remain cautious in the near-term, according to Anirudh Garg, partner and fund manager at INVasset PMS. "Risk-reward preferences could favour cash-rich, domestic-facing companies until clarity emerges."

 

After Trump took office, FPI went on a selling spree for a couple of months before returning to the market as the road ahead for policies and therefore equity markets remained uncertain, Deven Choksey, managing director of DRChoksey FinServ, said, adding that a similar situation could unfold this time as well.

 

“FPI holdings are declining due to these frequent pullouts. However, domestic mutual funds are likely to absorb the selling pressure,” Choksey said. 

Shift to China

What the markets are also seeing is some amount of shift in flows from within the EM towards China at the expense of India, Vaibhav Sanghavi, chief executive officer at ASK Hedge Solutions, said. "This is more of a rebalancing of portfolios rather than anything else."

 

India holds about a 20 per cent weight in the EM basket, so any inflows into EMs will likely result in a fair allocation to India as well, he added.

 

FII flows can come back to the Indian markets once the US Fed starts to cut interest rates, which could be as soon as September, analysts noted. "We believe two rate cuts of 25 basis points each are likely this year, which should be meaningful enough to drive flows into EMs, especially India," Sanghavi said.

 

On a relative basis, earnings have to improve for the valuations to become attractive, which in turn can drive flows back into Indian equities, according to Jyotivardhan Jaipuria, founder & managing director, Valentis Advisors. The banking sector, he said, could be the first to see an earnings improvement in 2026, which could help market valuations become more palatable. 

 

"On the other hand, if the other emerging markets rally and Indian markets remain range-bound, then relatively the Indian equities may start to appear attractive, which can then pull foreign money in," Jaipuria added.