Amid a confluence of three major devastating factors, including a dismal Q1 earnings season, Trump’s punishing 25% tariff on Indian goods, and a rampaging strong dollar, foreign institutional investors (FIIs) have been ruthlessly selling Indian stocks non-stop for the last 9 trading days, with the staggering figure touching Rs 27,000 crore.
The carnage intensified on Thursday alone, with FIIs pulling out about Rs 5,600 crore after the announcement of Trump’s tariff bombshell that rattled investors and challenged India’s cherished status as a safe haven. The already brutal Q1 earnings season has compounded the challenge for shell-shocked investors.
The earnings season has pushed FIIs to build record net short positions at a staggering 90%, surpassing the previous high of 89% during the January expiry. Nifty’s rollover for July stood at a concerning 75.71%, significantly lower than the previous month’s 79.53%.
Most alarmingly, FIIs’ long-to-short ratio in index futures at the beginning of the August series plummeted to an extremely oversold level of 0.11, as against 0.61 in the last series. This represents the lowest level since March 29, 2023. In stark terms, out of total FII positions in the index futures segment, a crushing 90% is on the short side.
India Inc’s Q1 earnings season has been muted, with scores of stocks reacting negatively to the results season. In the last one month IT index has lost 10% of its value while Nifty Bank is flat. India’s top 9 private banks reported 2.7% growth, reflecting circumspect economic growth and tepid credit demand, according to an ET report earlier.
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The sharp surge in the dollar index to 100 has also intensified the FII outflow. The dollar index, which gauges the greenback’s strength against a basket of six currencies, rose 2.5% this week to cross the 100-level. The dollar is now at a two-month high and is headed for its best week in almost three years against its major peers.
Global brokerage firm CLSA’s Vikash Jain said Trump’s comments question India’s advantageous position to trade with both the US and Russia freely, as well as raise doubts over its safe haven status, which stems from hopes of it getting more favourable trade terms than peer nations.
“While we are hopeful of India-US relations improving again in the medium term, this near-term uncertainty could further impact an already underperforming though expensive Indian equity market,” he said.
Despite the relentless selling pressure, market veteran Sunil Subramaniam offers a nuanced perspective on the FII exodus.
“FIIs had been selling right through the month. So, they probably had an inkling that the BTA is not really going India’s way, and there were other factors around the FIIs selling, which was China looking very good from a valuation and a growth upgrade perspective. I think China’s growth is now projected to shoot up to 4.8,” he explained.
Pointing out additional headwinds, he said in the US, the interest rates continue to remain high because the Fed is avoiding any talk of a rate cut.
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However, Subramaniam sees opportunity in the chaos, highlighting the war chest sitting with domestic institutional investors.
“Domestic institutional investors were sitting on surplus liquidity. Such corrections, which are panicky, are the ideal buying opportunities for them,” he said, adding that despite the FII selling, India remains reasonably overvalued in relative terms to other emerging markets and to our own history.
Market data reveals a potentially encouraging pattern. There have been four instances after March 2020 where FIIs’ long-to-short ratio at the beginning of the series stood at or below 0.15. In all four subsequent series, Nifty moved up with an average gain of over 7%, suggesting higher possibilities of short covering by FIIs in the futures segment in the days to come, analysts say.
Vikas Khemani of Carnelian Asset Management struck a defiant tone about India’s long-term prospects despite the current turbulence. “As the Fed rate starts coming down, you will see FIIs coming back in my opinion,” Khemani asserted.
As markets brace for continued volatility, the battle between foreign selling pressure and domestic buying appetite will determine whether this Rs 27,000 crore exodus marks a temporary storm or signals deeper structural shifts in global investment flows.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)