Retail Investors' SIPs Fuel Foreign Outflows Amid Market Volatility

Foreign Institutional Investors' Largest Sell-Off in Indian Stock Market

Foreign institutional investors (FIIs) conducted their largest sell-off in the Indian stock market in March, amid rising crude oil prices and escalating tensions in the Middle East. The country's vulnerability to these factors has led to a significant decline in investor confidence.

In the cash segment, FIIs sold equities worth ₹1.22 lakh crore for the month of March, the highest ever selling on a monthly basis. This is comparable to the sell-off in October 2024, when FIIs offloaded Indian stocks worth ₹1.14 lakh crore. The trend indicates a structural reallocation away from India and emerging markets, rather than tactical profit-booking.

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According to Sachin Sawrikar, Managing Partner at Artha Bharat Investment Managers, the Middle East crisis has created a perfect storm of rising crude oil prices, depreciating rupee, and high bond yields, which has spooked FIIs. This has led to a net selling position on every trading session in March.

Nandish Shah, AVP–PCG Research and Advisory at Motilal Oswal Financial Services, believes that the US Fed may increase interest rates in the near term, contrary to earlier expectations of a rate cut. This, in turn, reduces the appeal of emerging markets like India, further exacerbating the sell-off.

Analysts do not see a meaningful reversal in FII flows till the first half of FY27. FII selling is likely to persist in H1FY27 as fundamentals realign to the change in economic variables post the geopolitical disruption in the Middle East. Estimates still factor in an 11-12% earnings growth for the Nifty, which is likely to be cut.

Vishad Turakhia, CEO of Equirus Securities, believes that the lack of policy initiative to address the depreciating rupee, falling markets, and capital gains tax computed in rupees while FIIs measure returns in dollars is compounding their aversion to Indian stocks.

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Sawrikar opines that this combination is a perfect storm for a foreign investor, with their asset falling in value, currency depreciating, and net dollar return getting crushed from both ends. Until the government actively engages with the foreign investment community, whether through credible rupee support, clearer capital gains treatment, or direct outreach, India will continue to lose ground to markets like Taiwan, South Korea, and China.

The massive selloff on Dalal Street has pushed Nifty 50 almost 11% lower in March, its worst monthly fall in six years. However, mutual fund cash inflows have provided some cushion to the overall market, with data showing over ₹75,000 crore in inflows in the last one month.

Domestic institutional investors have absorbed the FII selling over the last 2-3 years, with flows from FII being more tactical and macro-driven, while domestic flows are systematic and long-term in nature. However, Sawrikar notes that India runs a structurally vulnerable current account, making foreign portfolio capital a necessary buffer.

Monthly SIP contributions of around ₹30,000 crore give domestic institutions the firepower to absorb FII selling in an orderly way, but what it has not prevented is a sustained, painful drawdown. Turakhia believes that without this cushion, the correction in the Indian market would be far steeper than what we are currently seeing.