The festive month of October saw the worst-ever selling by foreign institutional investors (FIIs), who withdrew about $10 billion worth of capital from the Indian stock market, surpassing the $7.9 billion sale seen during the Covid-led market meltdown in March 2020.

October is shaping up to be the highest-ever month for FII selling, despite starting from a larger basis. In March 2020, when foreign institutional investors (FIIs) sold Indian stocks worth $7.9 billion (Rs 58,632 crore), the Nifty fell 23% despite domestic institutional investors (DIIs) purchased Rs 55,595 crore.

This time, while FIIs sold stocks worth more than Rs 83,000 crore, DIIs, largely mutual funds, spent Rs 74,200 crore to be on the other side of the deal in October, according to NSDL data.

Unlike 2020, individual investors are not panicking, although the Nifty is down about 4% this month. Despite the sell-off by FIIs, DIIs had made a record buying of Rs 4 lakh crore this year.

While the velocity of flows into India's dedicated funds has slowed for the first time since 2022, foreign fund flows into China have persisted for the fourth straight week, with $18.7 billion inflows in the last month, according to Elara Securities.

The FII outflow has been largely attributed to the 'Buy China, Sell India' transaction. In the same month, while the Nifty has down 4%, the Hang Seng has risen 14%, and Shanghai's CSI 300 has up 22%.

"Investors expect China to eventually embark on meaningful stimuli that will not only support '24 growth but also extend into '25-26.' Furthermore, there is a view that the administration is now focusing on the economy, which means it is likely to downplay political, geopolitical, and regulatory difficulties," said Macquarie strategist Viktor Shvets.

India bull Chris Wood of Jefferies recently boosted his weightage on China, at the expense of India.

However, the fund management community appears to be divided on China's approach, with some referring to the Chinese government's stimulus as genuine and going for bottom fishing, while the other half sees it as a tactical tool.

Macquarie believes China's recent pivot is nothing more than an attempt to de-risk and underwrite growth targets, with policies that remain underpowered from a consumption and real estate standpoint: moderate clean-up of LGFVs and local debt, some stabilization of real estate, and minor changes in consumption and welfare spending, without addressing structural issues such as high savings and reliance on investment and exports.

"With elections coming up in the United States, it is expected that the trade war with China will become more aggressive, as we see in the European Union right now, and that the same factors will remain in place regardless of who wins," said Narender Singh, smallcase Manager and Founder of Growth Investing.

However, the FII outflow is more than just a Chinese story.

Investors are also concerned about the overvaluation of Indian equities, a weak corporate results season, and a stronger dollar.

"When markets are at such elevated levels, there is very little tolerance for missing earnings and bad news," says market veteran Ajay Bagga, who adds that the dollar index's rise beyond 103 is also having an impact on emerging markets like India.

The Q2 earnings season is simply adding to the problems. Auto shares, for example, are falling after Bajaj Auto reduced its projected growth for the two-wheeler motorcycle market in FY 2025 to 5% YoY, down from a previous projection of up to 8%.

Nifty heavyweight Reliance Industries (RIL) also experienced target price reductions after its Q2 results failed to move upward.