Foreign institutional investors (FIIs) are finding it simpler to remove some money from the table as Indian households continue to invest their wealth in stocks through mutual funds and demat accounts. Foreigners have taken it safe by selling off Indian stocks worth almost $2 billion in the first seven trading days of 2025, ahead of the action-packed next few weeks that include the ongoing Q3 earnings season, Donald Trump's swearing-in on January 20, the Fed meeting outcome on January 31, and the Union Budget on February 1.
Retail investors have found success with the straightforward buy on dips strategy, but with earnings differentials narrowing and valuation premiums being high, the global risk appetite for Indian stocks appears to be low at the moment.
Due to declining profitability and rising valuations, international brokerage giant HSBC became the first to downgrade India to neutral in 2025 and further lower the Sensex 20205 objective to 85,990.
FIIs are selling Indian stocks for the following six reasons:
1) Pain in earnings
India Inc. has seen a decline in earnings over the past two quarters following four years of robust double-digit growth. It's unlikely that the Q3 results will surprise anyone. Brokers anticipate single-digit growth in FY25 full-year earnings.
2) Weakening macros
A downturn has been confirmed by the Indian government's advance GDP forecasts for FY25. According to the Ministry of Finance's prognosis of 6.5% and the RBI's projection of 6.6%, real GDP growth for FY25 is expected to decelerate to 6.4% YoY from 8.2% in FY24.
"This will have many ramifications for consumer and business confidence, wage growth, corporate revenues, consumption, investment, credit demand and, most importantly, the fiscal arithmetic," Rahul Bajoria of BofA Securities India said.
3) Yields on bonds
In response to better-than-expected job data and signs that the services sector was performing exceptionally well, the benchmark 10-year US Treasury yield reached 4.73%, its highest level since April. According to economists, this implies that the Fed may decide to hold rates in January, which would further boost the dollar and raise bond yields.
4) Fear of tariffs
After Trump assumes office on January 20, the ultimate effects of his policy changes will determine the US economy's future.
"The outlook for export-focused emerging economies (EMs) like China may depend on how severe Trump's trade restrictions are after he takes office in less than three weeks.
In a larger EM rise led by laggards, India may perform poorly due to strong trade restrictions that draw inflow into EMs like China, but the opposite may also be true, according to CLSA.
5) Cycle of slow rate cut
The US Fed's remarks from last month cast doubt on significant rate decreases in the US in 2025. The Fed's December policy meeting minutes, which were made public on Wednesday, revealed that policymakers were worried that President-elect Donald Trump's proposed immigration and tariff policies would make the battle against inflation take longer.
Only a single 25 basis point Fed rate drop in 2025 is fully priced into the markets.
6) Dalal Street versus Wall Street
According to another opinion on the Street, rising economies like India are leaving the US market because it is suckling up a lot of global cash.
The dominance of the US market is causing the "weakening national currencies of different countries" as it takes money from other economies, according to Ruchir Sharma of Rockefeller International. In a recent statement, he referred to the US's overwhelming domination over the world's financial markets as the "mother of all bubbles."
