FPIs turn sellers in June after 2-month buying streak. Will Iran-Israel tensions trigger more outflows?

Stock market today: Rising tensions in the Middle East appear to have caught the attention of overseas investors, who turned bearish on the Indian stock market in June after two consecutive months of net purchases. FPIs have alternated between buying and selling so far this month but have largely stayed on the sidelines in most sessions, withdrawing ₹4,192 crore through exchanges, according to NSDL data.

The escalating conflict between Iran and Israel — with the U.S. now officially entering the war by launching attacks on Iran alongside Israel — has brought fresh concerns to Indian stock market, impacting the sentiment of overseas investors, especially as Indian stock market are already viewed as expensive compared to other Asian peers.

Despite continued FPI selling, the Indian stock market has remained resilient in June so far, with both front-line indices gaining nearly 1%, thanks to strong support from domestic institutional investors (DIIs), primarily driven by mutual funds. DIIs acquired shares worth over ₹59,000 crore in June so far, following net purchases of ₹66,194 crore in May.

Mutual funds alone contributed more than ₹35,900 crore in June, compared to ₹53,260 crore in the previous month. Although FPI inflows have fluctuated over the past six months, strong domestic buying has helped sustain market momentum — even amid heightened geopolitical tensions, global trade war concerns, and rich valuations.

FPIs turned into net buyers in April by infusing ₹4,223 crore, according to the depositories data. Before this, foreign portfolio investors (FPIs) had pulled out ₹3,973 crore in March, ₹34,574 crore in February, and a substantial ₹78,027 crore in January.

Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said, "After a big buy figure of ₹19,860 crore in May, FPIs turned less confident in June, with bouts of selling and buying. Net FII activity in June till the 20th is a sell figure of ₹4,192 crore (NSDL)."

He added that in the first half of June, FPIs were sellers in FMCG, power, consumer durables, and IT sectors, while they were buyers in financials, chemicals, capital goods, and real estate. “The buying reflects fair valuations and good prospects in those segments, while the selling points to relatively high valuations and diminished outlook in others,” he explained.

FPI have also remained net sellers in the debt market. “The yield differential between U.S. and Indian sovereign bonds is at a historic low of around 2%. Given the currency risk, investing in Indian bonds doesn't make sense currently, and this trend of FPI selling in bonds is likely to continue,” Dr. Vijayakumar noted.

Will FPI outflows persist amid escalating geopolitical tensions? 

Vipul Bhowar, Senior Director – Listed Investments at Waterfield Advisors, stated that the trend of Foreign Portfolio Investment (FPI) reversed in April and strengthened considerably in May, marked by positive inflows. The inflows in May were the highest in eight months, indicating a resurgence of interest from foreign investors in Indian markets.

However, he noted that geopolitical tensions, including the ongoing conflict between Israel and Iran, along with broader global uncertainties, have led to a cautiously optimistic approach in June. He added that improving domestic fundamentals and a favorable long-term growth outlook suggest that, if global conditions stabilize, India could witness more sustained and stable FPI inflows in the future.

Vijayakumar, echoed this view, stating that global uncertainty dominated by geopolitics — particularly the war in West Asia — will continue to shape FPI activity going forward.

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