FPI Outflows Reach Five-Month High Amid Weak Earnings
Foreign investors pull out ₹35,962 crore amid weak earnings, rupee depreciation.
Photo by Manu Mateo
Foreign Portfolio Investors (FPIs) net sold ₹35,962 crore worth of Indian equities in January, marking a five-month high in outflows, according to data from the National Securities and Depository Ltd. This continues a trend from the previous year, where FIIs sold ₹1,66,286 crore in Indian equities in CY2025. However, foreign fund managers were net buyers through the mutual fund route, purchasing ₹312 crore over four months.
Weak earnings and rupee depreciation are cited as primary reasons for the selling. Despite decent Q3FY26 earnings, with beats slightly ahead of expectations, FPI flows are expected to remain volatile.
Key Facts
FPI net sold: ₹35,962 crore in January
CY2025 FII sales: ₹1,66,286 crore
Mutual fund net buy: ₹312 crore (4 months)
UPSC Exam Angles
Economy - FPI and its impact on Indian economy
Indian Financial Market
Balance of Payments
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More Information
Background
The history of Foreign Portfolio Investment (FPI) in India can be traced back to the early 1990s when India initiated economic liberalization. Before that, foreign investment was heavily restricted. The Narasimham Committee reports (1991 and 1998) played a crucial role in shaping the regulatory framework for FPI.
These committees recommended opening up the Indian stock market to foreign institutional investors (FIIs, now known as FPIs) to bring in capital and improve market efficiency. The Securities and Exchange Board of India (SEBI) was empowered to regulate and monitor these investments. Over the years, the regulations have been refined to balance attracting foreign capital with maintaining financial stability.
The initial focus was on long-term investments, but gradually, regulations were eased to allow for a wider range of investment strategies.
Latest Developments
In recent years, FPI flows have become increasingly volatile, influenced by global economic conditions, geopolitical events, and domestic policy changes. For example, the US Federal Reserve's interest rate hikes in 2022 and 2023 led to significant FPI outflows from emerging markets, including India. The COVID-19 pandemic also triggered substantial outflows initially, followed by a strong rebound as global liquidity improved.
The government has taken steps to attract and retain FPI, such as simplifying regulations, reducing tax burdens, and improving market infrastructure. The future outlook for FPI flows remains uncertain, with analysts predicting continued volatility due to ongoing global economic uncertainties and potential policy changes in major economies. The inclusion of Indian bonds in global bond indices is expected to attract more stable, long-term FPI flows.
Frequently Asked Questions
1. What are the key facts about FPI outflows in January for UPSC Prelims?
In January, Foreign Portfolio Investors (FPIs) net sold ₹35,962 crore worth of Indian equities. This marks a five-month high in outflows. Remember this figure for potential MCQs.
Exam Tip
Focus on remembering the magnitude of the outflow and the time period (five-month high).
2. What is the primary reason cited for the FPI outflows?
Weak earnings and rupee depreciation are the primary reasons cited for the selling by FPIs.
3. How do FPI flows impact the Indian economy?
Significant FPI outflows can lead to a depreciation of the Indian rupee and increased volatility in the stock market. This can affect overall investor sentiment and economic stability.
4. What was the trend of FII investment in CY2025?
FIIs were net sellers in CY2025, selling ₹1,66,286 crore in Indian equities.
5. How do FPI investments through the mutual fund route compare to direct equity investments?
While FPIs net sold a large amount of equity directly, they were net buyers through the mutual fund route, purchasing ₹312 crore over four months. This indicates a mixed investment strategy.
6. What are the recent developments regarding FPI flows?
The recent development is the significant outflow in January, reaching a five-month high, despite decent Q3FY26 earnings. This suggests that factors beyond immediate earnings are influencing FPI decisions.
7. What is the role of National Securities Depository Limited (NSDL)?
As per the topic, NSDL provides the data on FPI flows, indicating its role in tracking and reporting foreign investment activities in the Indian stock market.
8. How might the government respond to significant FPI outflows?
The government might consider measures to stabilize the rupee, attract more foreign investment, and improve investor confidence. However, the specific measures would depend on the overall economic context.
9. What is the historical background of FPI in India?
The history of Foreign Portfolio Investment (FPI) in India can be traced back to the early 1990s when India initiated economic liberalization. Before that, foreign investment was heavily restricted.
10. How does rupee depreciation affect the common citizen?
Rupee depreciation can lead to increased prices for imported goods, including fuel and electronics. This can increase the cost of living for common citizens.
Practice Questions (MCQs)
1. Consider the following statements regarding Foreign Portfolio Investment (FPI) in India: 1. FPI is generally considered more stable than Foreign Direct Investment (FDI) due to its long-term nature. 2. FPI flows are influenced by both domestic macroeconomic factors and global economic conditions. 3. All FPIs in India are required to register with the Reserve Bank of India (RBI). Which of the statements given above is/are correct?
- A.1 and 2 only
- B.2 only
- C.1 and 3 only
- D.1, 2 and 3
Show Answer
Answer: B
Statement 1 is INCORRECT: FPI is generally considered LESS stable than FDI because it can be quickly withdrawn in response to market fluctuations or changes in investor sentiment. FDI involves a long-term commitment and direct control over assets. Statement 2 is CORRECT: FPI flows are indeed influenced by both domestic macroeconomic factors (like GDP growth, inflation, and interest rates) and global economic conditions (like global growth, interest rates in developed countries, and geopolitical risks). Statement 3 is INCORRECT: FPIs are required to register with SEBI (Securities and Exchange Board of India), not RBI.
2. Which of the following is NOT a reason for Foreign Portfolio Investors (FPIs) to pull out investments from a country like India? A) Depreciation of the local currency B) Increase in domestic interest rates C) Global economic slowdown D) Political stability and strong governance
- A.Depreciation of the local currency
- B.Increase in domestic interest rates
- C.Global economic slowdown
- D.Political stability and strong governance
Show Answer
Answer: D
Options A, B, and C are all factors that can lead to FPI outflows. Depreciation of the local currency (A) makes investments less valuable in foreign currency terms. An increase in domestic interest rates (B) might initially attract FPI, but can also signal economic instability or government efforts to control inflation, leading to outflows if investors fear a slowdown. A global economic slowdown (C) reduces risk appetite and can cause investors to move funds to safer assets. Political stability and strong governance (D) are generally positive factors that attract and retain FPI.
3. With reference to the Indian financial market, consider the following statements: 1. The National Securities Depository Limited (NSDL) is responsible for holding and managing securities in dematerialized form. 2. Foreign Portfolio Investors (FPIs) can invest in Indian equity markets only through the primary market. 3. Rupee depreciation always leads to FPI outflows. Which of the statements given above is/are NOT correct?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show Answer
Answer: B
Statement 1 is CORRECT: NSDL is indeed the largest depository in India and holds securities in dematerialized form, facilitating electronic trading and settlement. Statement 2 is INCORRECT: FPIs can invest in both the primary market (through IPOs, etc.) and the secondary market (through stock exchanges). Statement 3 is INCORRECT: While rupee depreciation can often lead to FPI outflows as it reduces the value of their investments in dollar terms, it's not always the case. Sometimes, a weaker rupee can attract FPIs looking for cheaper assets, depending on other economic factors and investor sentiment.