Why foreign investors are dumping Indian stocks, pushing rupee down | Explained News

The last time FPIs sold more was in January 2025, when net outflows amounted to just over $9 billion. Since the start of 2025, FPIs have been net sellers of Indian shares in 10 out of 15 months. Sale of Indian assets denominated in the rupee lowers demand for the Indian currency and cuts its value. As such, continued sale of Indian shares and other assets such as government bonds by foreign investors leads to the rupee’s fall as it constitutes an outflow of foreign money from India — similar to the impact of a widening trade deficit from more expensive oil.

“We downgrade India to neutral as the equity market enters a delicate phase,” Hou Wey Fook, Chief Investment Officer of Singapore-based DBS Bank, said on Friday. “While growth, policy support and demographics remain supportive, rising risks warrant a more cautious view. AI disruption is weighing on the IT services sector, while export-oriented industries face intensifying competition from China and Southeast Asia, particularly in autos and auto components amid rising costs and EV pressures,” he said.

The exit of foreign money from Indian shores has not been limited to the stock market. Foreign Direct Investments (FDI) — seen as a more stable form of foreign investment than in the stock market — into India saw net outflows in three of the last four months of 2025 as per latest available data from the Reserve Bank of India (RBI) — well before the conflict began in West Asia.

In fact, the Economic Survey for 2025-26, which was tabled in Parliament on January 30, had warned that the paradox of 2025 had been that India’s “strongest macroeconomic performance in decades has collided with a global system that no longer rewards macroeconomic success with currency stability, capital inflows, or strategic insulation”. As a result, the rupee’s valuation did not accurately reflect India’s “stellar economic fundamentals”, which was causing investors to pause.

The rupee, which fell below 90 and 91 per dollar in December, breached 92 earlier this month. And if crude oil prices remain elevated and average $100 per barrel in 2026-27, economists expect the rupee to weaken further. According to a scenario analysis by QuantEco Research’s economists, if oil averages $100 per barrel in the next fiscal, the rupee could weaken to as much as 98.5 per dollar.

To be sure, while the fall in Indian stock markets has been sharp — Sensex and Nifty 50 dipped more than 5 per cent this week, marking their biggest weekly fall in nearly four years — it has been lower than in some other markets, such as South Korea’s Kospi, which have been riding high on the Artificial Intelligence (AI) wave.

While the Sensex and Nifty 50 are down around nine per cent since February 26, the Kospi has crashed by more than 13 per cent over the same period despite gaining ground in recent days.

“What makes the South Korean selloff stand out is its severity,” Dave Chia and Stefan Angrick of Moody’s Analytics said in a note. “The drop after the outbreak of the conflict is broadly comparable to the decline seen after US President Donald Trump announced his ‘Liberation Day’ tariffs last April. In most other APAC economies, equity losses have been far less pronounced. The main exceptions are Thailand and Indonesia.”

According to Japanese investment bank Nomura, Thailand is the most vulnerable Asian country to the shock from Iran’s closure of the Strait of Hormuz, followed by South Korea and India. Analysts expect Indian markets to remain volatile in the near term as geopolitical tensions in West Asia keep energy prices elevated and sentiment fragile.