
Will foreign investors return to Indian markets in 2025?

Summary
Experts believe that if the upcoming budget strikes the right chord with investors, Indian markets could soon see FIIs return with renewed vigour.MUMBAI : While FIIs gave India the cold shoulder in 2024, DIIs demonstrated remarkable resilience, maintaining strong inflows. In October, when Indian markets saw the largest foreign institutional investor (FII) sell-off of the year at ₹91,933.64 crore, domestic institutional investors (DIIs) stepped in with the highest monthly net purchases of ₹105,253.33 crore.
In fact, 2024 was the fourth consecutive year when DIIs poured more money into markets than FIIs, showed a 2 January IIFL Securities report.
Though FIIs returned as net buyers in December, it may be too soon to assume that the trend will continue throughout 2025.
“The significant FII selling in the last quarter of 2024 suggests caution, likely driven by a mix of global macroeconomic factors and domestic concerns," according to the research team of Bajaj Broking (Bajaj Financial Securities).
The continuation of this trend in 2025 will largely depend on how the global economy performs, the actions taken by the Indian government and the Reserve Bank of India (RBI), and corporate earnings. If global interest rates remain high or inflationary pressures persist, FIIs might continue to favour developed markets, it added.
“However, we believe India’s growth story will regain momentum, and the coming budget will focus on growth. Hence, FIIs will look to re-enter Indian equities in the coming months."
Meanwhile, robust SIP inflows and strong retail participation in broader markets are bolstering DIIs' resilience, as evidenced by the steady rise in demat account openings.
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“Notably, mutual funds contributed to approximately 80% of net flows by DIIs in 2024 on a CYTD basis. While the ownership of Indian households in equities has increased, it is still lower compared to global peers," said Mirae Asset Mutual Fund's annual outlook report.
Strong DII flows and buoyant market conditions fueled robust activity in the primary markets, with equity raising as a share of gross domestic product (GDP) reaching its highest level since the global financial crisis, according to a January 2 report by Nuvama Institutional Equities. “Furthermore, promoters and private equity firms exploited the bull market logging record-selling."
Experts' take
Looking ahead, the market buzz suggests that while DII inflows are set to remain steady, FII selling might be a short phase. If the upcoming budget strikes the right chord with investors, we could soon see FIIs returning with renewed vigour.
“We believe that the subdued FPI flows in 2024 is not a trend but a more tactical shift away from India probably led by relative (attractive) valuations in other markets like China (above average valuations in India)," said Jay Kothari, global head-international business, DSP Asset Managers Pvt. Ltd.
He expects global flows to rise again as “India remains one of the fastest growing large economies with stable macro/politics/currency and availability of good businesses/companies with strong balance sheets and return on equity profile".
FPIs remain underweight on India, which may lead to them adding weight at some point, especially after the recent pullback (time correction) in equity market valuations, he added.
Interestingly, FIIs have been participating even when there has been a broader FII sell-off, as seen in October-November, said Mahesh Natarajan, head-equity capital markets, Nomura. “Long-only FIIs have demonstrated resilience in supporting Indian initial public offerings (IPOs) with around 46% share of the anchor book (calendar year 2024)."
While there would be bouts of profit booking and geographical reallocation, the broader FII trend of investing in India will continue, especially with the long-only FIIs, he added.
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He also said foreign portfolio investors were ramping up India-dedicated pools and devoting increasing bandwidth to evaluating India opportunities. “We are also seeing a number of India-dedicated FPIs getting incremental inflows, which are resilient to any geographical reallocation trades."
The long-term outlook
In the long term, many experts believe certain emerging markets, such as India, are well-positioned to attract inflows and capitalize on the competition between the US and China.
Meanwhile, predicting short-term FII flows is difficult, said Neelesh Surana, chief investment officer, Mirae Asset Investment Managers (India). “However, historical patterns show that FII selling tends to happen during periods of high volatility, which happened in only four years out of the last two decades. In 2024, global factors such as the Fed’s rate cuts, strong US markets, and slower earning growth versus valuation caused FII outflows."
Though India’s GDP growth slowed in the September quarter due to cyclical factors, structural drivers remain intact, and a rebound is expected through 2025. “As GDP growth stabilizes and earnings improve, it could attract FII flows, especially given that their holdings are at an all-time low of 16.5%," Surana added.
“There’s a limit to how much FIIs can sell; it's not as if they will offload everything and exit India entirely," said Santosh Kumar Singh, fund manager at Motilal Oswal Asset Management Co.
He added that while high valuations were a concern in 2024, it is essential to remember that India remains the fastest-growing economy. That said, 2025 is unlikely to play out like 2024. “If the Fed goes for significant interest rate cuts, we could see a strong influx of FII money into India."
Singh believes that 2025 will be a challenging year. Indian companies are experiencing an earnings downgrade cycle after three years, and the economic growth rate is also falling short of expectations. Nonetheless, a supportive budget could act as a catalyst for attracting more inflows. Stable taxation policies, sustained government spending, and measures to boost consumption are expected to keep FIIs highly interested in India.
He added that DIIs are less of a concern since they typically adopt a bottom-up rather than a top-down strategy. Ultimately, a reversal in the earnings slowdown will be a key driver for inflows from both FIIs and DIIs.
Kothari of DSP Asset Managers believes DII inflows will continue as this is more of a structural trend (financialization of savings). Investors have also evolved, and we see more top-ups in investments whenever markets see a downturn.
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“To give you a perspective, with a 30% savings rate in India across households and corporates in an economy (GDP) of $3.4 trillion amounts to approximately $1 trillion in savings, and even if 10% flows to equities, it may result in a $100 billion flows each year. Hence, we think this trend will continue as equity allocations remain controlled in India versus other developed and developing economies," he said.