Making sense of street signs

FPI selling is driven mostly by global factors

The performance of the Indian stock markets is being intensely debated. The benchmark Nifty 50 is down over 12 per cent since the beginning of the year. Expectedly, various aspects of the issue were extensively discussed at the annual Business Standard BFSI Insight Summit, which ended on Wednesday. One of the biggest reasons for the Indian stock markets’ underperformance is relentless selling by foreign portfolio investors (FPIs). At a net level, they sold stocks worth over ₹2.9 trillion so far this year.  There are several reasons why FPIs are selling Indian stocks, the biggest being the artificial-intelligence (AI) trade. Some analysts have also pointed out the difficulties that FPIs tend to face in the Indian markets.

 In this regard, Securities and Exchange Board of India Chairman Tuhin Kanta Pandey noted at the summit that the regulator was engaged with FPIs from across the world. There are some issues, and the regulator is working on them. The time taken for registering an FPI, for instance, has declined significantly. In the broader context, Mr Pandey also highlighted that market capitalisation as a share of gross domestic product had increased from about 69 per cent in 2015-16 to about 130 per cent this financial year. Clearly, the increase has been driven mostly by new listings and not necessarily by valuation expansion. In fact, valuations have been significantly compressed in recent periods.

 As was pointed out at the summit, in terms of the number of initial public offerings (IPOs), India was at the top of the charts globally in 2025 and ranked number three in terms of value. Significant activity is being witnessed this year as well. Notably, Jio Platforms, which had the biggest IPO, was listed this week at a significant premium and became the second-most valuable company on the Indian exchanges. The Jio IPO and its listing highlight another layer in the ongoing market debate. Despite the broader trend, demand for the IPO, including from FPIs, and its successful listing clearly show that the Indian market is capable of providing risk capital at scale to strong businesses. This has been made possible partly by sustained increases in participation by domestic investors, including through mutual funds. Domestic institutional investors have bought stocks worth over ₹7 trillion since the beginning of this year.

 At a fundamental level, as analysts have rightly pointed out, not much has changed for the Indian markets. The economy is growing strongly and there isn’t much to complain about the incoming corporate results for the second quarter this financial year. Thus, FPI selling is being driven largely by global factors. Besides the increased investment in AI-related companies, risk aversion owing to geopolitical uncertainties has also affected foreign flows. Further, rising bond yields in developed countries and currency-market volatility are complicating investment calculations for global fund managers. Nonetheless, there are issues that India must debate and address. FPIs compare post-tax dollar returns in various jurisdictions, which tends to adversely affect India allocation. Thus, there is a need to align India’s tax policy with global best practices. While the stock markets have gained depth, India still needs foreign capital to supplement domestic savings. Another aspect worth debating is how different instruments are taxed for resident Indian investors. It is being argued that lower taxes on equity are pushing households to the stock markets. There are various ways of bringing parity.