India’s equity markets have seen a turnaround in the last six months, following the sell-off that occurred between October 2024 and February 2025. The benchmark Nifty50 Index has gained close to 10 per cent since the end of February. However, over the 12-month period, the large-cap index is still down 1.2 per cent. A notable trend that is clearly visible in the markets currently is that foreign institutional investors have been heavily selling Indian stocks, even as domestic institutions have been buying, thanks to a growing inflow of retail money into mutual funds.
According to data from NSDL, foreign portfolio investors sold Indian equity worth nearly Rs 1.19 lakh crore in 2025 till August 26. They were buyers in April, May and June, but have been sellers in all other months so far this year.
Global geopolitical tensions, the US trade tariffs-related uncertainty and weak corporate earnings for the April-June quarter are among the reasons why foreign institutional investors seem nervous when it comes to investing in the Indian markets currently.
The US Administration this week formally confirmed that the additional 25 per cent duties on Indian goods imports will take effect from Wednesday. This will bring the total tariffs levied on Indian goods imports to 50 per cent. US President Donald Trump had blamed India for fuelling the war in Ukraine by buying Russian crude oil and slapped additional tariffs.
Amid these uncertainties, investors will find Indian markets relatively unattractive and hence the selling pressure, say analysts.
“India is expensive,” said Yogesh Aggarwal, head of research, India, HSBC.
India (Nifty 50 proxy) is currently trading at a PE (price to earnings multiple) of 20 times, which is a 20 per cent premium to its 10-year average, he pointed out.
“Compared to other countries like China, Indonesia, Korea, etc., it is 60 per cent more expensive. There are multiple credible reasons to justify India’s high valuations, and likely most of these may remain intact in the near term. Still, we believe, long-term risks around growth and falling ROE (return on equity) need to be acknowledged,” said Aggarwal.
Not surprisingly, given the high valuations, FIIs have been channelling their money elsewhere. According to an analysis by Nomura, in July, investors re-allocated from India to Hong Kong/ China and Korea. Emerging Markets (EM) investors’ relative allocations to India decreased significantly, while increasing materially to Hong Kong/ China and Korea, it pointed out.
EM funds’ relative allocations to India, as of end-July 2025, based on trimmed mean estimates, decreased by 1 percentage point month-on-month, with 41 funds out of 45 in Nomura’s sample set, posting lower relative allocations. In contrast, allocations to Hong Kong/ China and Korea increased by 0.8 percentage point, 0.7 percentage point and 0.4 percentage point, respectively, pointed Chetan Seth, Asia Pacific equity strategist at Nomura.
“India now appears to be the largest underweight market in EM investors’ holdings; 71 per cent of the funds are underweight as at the end of July, when compared with the end-June snapshot where 60 per cent of funds were underweight,” said Seth.
Notably, though, FPIs have continued to invest in India’s primary markets, an indication that they may be finding at least some of the new companies going public and their valuations attractive. FPIs have invested around Rs 35,000 crore in the primary market, data indicates.
The selling in the Indian secondary market by FIIs is in stark contrast to the continued buying by domestic institutions. According to data from Trendlyne, DII (domestic institutional investors) have net purchased close to Rs 4.95 lakh crore in the cash/ spot market.
Indian investors have taken to equity investing in a big way over the past few years, and that has ensured a continuous inflow of domestic money that, in a way, contained the downfall in the Indian equity market.
According to data from the Association of Mutual Funds of India (AMFI), equity mutual fund inflows surged 81 per cent in July to top Rs 42,700 crore. Now, close to Rs 28,500 crore is coming into equity markets through MF systematic investment plans (SIP) alone.
But, fund managers have a word of caution, and say one would need to be very selective right now.
“We will be more conservative, but we are buying; there are opportunities,” said Sahil Kapoor, head of products and market strategist at DSP Asset Managers. A key factor he closely watches is valuations and quality.
The fund house invested heavily in banking and financial service companies when they were not doing very well last year, but valuations were at 20 20-year average. They are still close to average valuations, said Kapoor.
It has also started to slowly dip into large-cap information technology stocks.
“...once again, the street is not very comfortable now. People are thinking about job losses, global tensions, etc. But the margin of safety is coming back slowly. It is not an absolute play, and I can’t say they have become cheap. Just that relative to the rest of the market, they have become better,” said Kapoor.
Since the global financial crisis, IT companies saw their earnings per share (EPS) grow at 12-15 per cent compounded annually, he said. Currently, they may be growing at best 4-5 per cent, but that could be a cyclical low in terms of profit growth.
“Forget about 15 per cent. If these companies can grow even at 8-9 per cent and if you are available at 19 times and the rest of the market is available at 30-35 times, and they make a 45 per cent ROIC (return on invested capital), I am ok buying some of it,” said Kapoor.
Other than large-cap IT, he also sees some value emerging in a few pharma companies, private sector banks, 1-2 auto firms and public sector energy companies, but very few fast-moving consumer goods (FMCG) companies.
The FMCG sector has struggled over the past year, with sluggish demand, especially in urban markets. With that expected to pick up in the second half of this financial year and the income tax cuts, as well as the likely GST (goods and services tax) cuts expected to give a further consumption boost, FMCG stocks have started seeing some momentum. But Kapoor is not convinced just yet.
“Indian FMCG has a very high ROE. They are very high-quality businesses. But when you look at high-quality businesses, you need to look at valuations and growth. In this sector, currently, both are absent, neither good valuations nor good growth,” he noted.
He also finds valuations in the industrials space expensive, right now.