The month of October witnessed heightened volatility in global equity market due to uncertainty fuelled by the US elections and other geopolitical tensions. But Indian markets slumped and recorded the highest foreign portfolio investment (FPI) outflow among global economies. This appears to be due to the higher valuation and prolonged bull run in Indian equities in the preceding months.

Analysis of data from Bloomberg showed that 8 out of 11 countries recorded net FPI outflows in October. Only Taiwan, Philippines and Japan recorded net inflows in this period. Data on China’s foreign institutional investor (FII) flows for October were not available. India’s overall FPI outflow at $10,428 million is the highest among global economies, for which global fund flow data is available.

Worst fall since Covid

During the same period, returns on the benchmark indices also saw a decline in 8 out of the 11 countries with India’s Nifty recording its worst monthly fall of 6.2 per cent since the Covid month of March 2020. Philippines, Malaysia and Vietnam were other markets that saw a decline in the month at 3.2 per cent, 2.9 per cent and 2.1 per cent respectively.

Riaz Thingna, Partner, Grant Thornton Bharat, said that higher interest rates in developed markets and attractive valuation offered by other markets such as China, Hong Kong and Japan have been among key drivers of foreign investment outflows from Indian equities.

“This [the selling] is happening across the globe; some of the Asian markets that have experienced FII sell-offs lately are South Korea, Thailand, Indonesia and Malaysia. Further, there has been a trend of FIIs diversifying into European markets on account of currency stability,” he said. As per his estimates, post the stimulus, China recorded an inflow of around $53 billion in two weeks, followed by an outflow of approximately $15 billion shortly after in the last three weeks of October.

FIIs’ China route

India’s robust FPI inflows in calendar year 2024 have been wiped out due to a large outflow of $11,473 million in October. As a result, India clocked net FPI outflow of $407 million in 2024 (January to November 6).

Analysts note that slowing earnings growth, elevated valuations, and recent stimulus measures in China have led to FIIs taking money out of India and allocating to China. China has been historically more affordable compared to the India market and with valuations in India going up recently, there has been a disparity in FII flows, they said. However, they also acknowledge that this has been true globally.

Rakesh Vyas, co-Chief Investment Officer and Portfolio Manager, Quest Investment Advisors, notes that initially FII outflows were linked to a “Buy China, Sell India” decision for portfolio rebalancing but it was later driven by lower earnings growth in the Indian market and premium valuation compared to historic averages.

“With US election uncertainty behind and rising US yields coupled with muted earnings’ growth by Indian companies implies that some more selling by FIIs could continue,” he notes. “However, among the emerging markets the expected earnings growth for India in FY26 remains attractive and hence continued selling by FIIs in CY25 is unlikely,” he added.  

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