V.L.A. Ambala, a SEBI-registered Research Analyst brings over a decade of experience in financial markets. She is widely known for her strategic insights and technical expertise, wherein, she has guided around 5000 traders in developing long-term trading skills, risk management strategies, and a disciplined market approach. Furthermore, with a strong following of 132k+ on Telegram and over 1 lakh YouTube subscribers, V.L.A. Ambala is a respected voice in the financial industry. Her ability to simplify complex market trends and provide actionable insights makes her an ideal expert to discuss pressing market issues.

In an exclusive interaction with Finance Outlook India, V.L.A Ambala delves in the impact of foreign investor sell-offs on Indian Equity Markets:

How do foreign investor sell-offs influence market volatility and the valuation of Indian equities across various sectors?

FII sell-offs tend to have a notable influence on the Indian stock market and can impact it in more than one way. To begin with, aggressive sell-offs can trigger market volatility and hamper equity valuations, creating downward pressure on stock prices. In addition, depreciation of the Indian rupee due to outflow can add to the inflationary pressure, making imports expensive. In the last couple of months, we have seen FIIs aggressively sell off their positions in the Indian equity market. Data shows that in January 2025, around $9 billion was offloaded by foreign investors from Indian equities. The main reason behind this momentum is money flooding into US bonds after the dollar recorded a new high, making US bonds more attractive to invest in compared to Indian equities. 

What factors typically drive large-scale sell-offs by foreign investors in Indian equity markets, and how can domestic investors mitigate the impact?

Various factors, including concerns over global economic stability, high valuations, and depreciating INR, prompt investors to withdraw from Indian markets. For instance, US bonds are currently offering impressive yields, making them attractive to global investors. On the other hand, the high stock valuations are discouraging foreign investors from putting their money in Indian equities. To mitigate the risk of high sell-offs, domestic investors should diversify their portfolios across all sectors and assets. Additionally, before investing in any company stock they should check their financial health across the years and analyze how they have performed, especially during market volatility.  

What measures can Indian regulators, such as SEBI, implement to stabilize the equity markets during periods of significant foreign investor sell-offs?

SEBI can implement several measures to help stabilize the equity market during significant foreign investor sell-offs, such as introducing strict rules for equity stocks and market derivative instruments. This move will help align derivatives trading closer to asset values. I believe that by simplifying the foreign investment process, SEBI can help attract more investments over the long term. The more the process is simplified, the more investors will start investing in Indian equities, reducing the risk of high sell-offs. In addition, the regulator can enhance market surveillance to curb manipulation and strengthen regulations in the derivatives market to reduce speculative trading. Introducing circuit breakers can also prove useful during phases of extreme price volatility. Notably, SEBI and RBI proactively implement these measures as and when the situation demands.

How does the participation of domestic institutional and retail investors counterbalance the effects of foreign investor sell-offs on market performance?

Domestic institutional and retail investors play a crucial role in counterbalancing the effects of foreign investor sell-offs on Indian market performance. The consistent inflow from domestic and retail investors helps in managing the balance and filling the gap created by foreign outflows. For instance, in October 2024, FIIs withdrew an amount of Rs. 114,445.89 crore from the Indian market. However, on the other hand, DIIs bought shares worth Rs. 107,254.68 crores, saving the market and investment sentiment in the process. Meanwhile, the Indian market has also witnessed robust investment growth in SIPs, with nearly $2 billion in inflows in the first week of January, making it an all-time high investment offering a steady stream of capital investment to market participants. This shows that more retail investors are inclined towards professionally managed funds to combat the impact of volatility.

What strategies can Indian companies adopt to attract and retain foreign investment amidst global economic uncertainties?

To attract and retain foreign investment amidst global economic uncertainties, Indian companies should adopt strategies such as offering transparency and improving governance, which will win the trust of investors. Additionally, availing benefits of government-backed schemes like PLI can further help attract foreign investments and offer a boost to their domestic manufacturing prowess. Companies should also diversify their portfolios in other sectors, especially those that require higher foreign investments, such as the renewable energy sector or technology sector, to ensure they have multiple revenue channels at their disposal. However, companies could benefit more in a favourable policy environment. Support in the form of tax security, extension of PLI benefits to broader sectors, and schemes that promote ease of doing business can benefit Indian companies and boost foreign investment inflow.