FPIs are coming back to the Indian stock market. 5 reasons behind the change in trend

FPIs are returning to the Indian stock market following months of withdrawals. 5 important causes for the shift in trend After withdrawing billions of dollars from Indian markets through exchanges, foreign investors changed their perspective on the world’s fifth-largest market in March, decreasing their selling rate and becoming net purchasers. This allowed the Indian stock market to take a break after months of relentless outflows.

In the past three trading days, they were net purchasers, injecting ₹3,055 crore on Monday, ₹7,470 crore on Friday, and ₹3,239 crore on Thursday, totaling ₹13,746 crore. The overall market rebound has been even more significant, with the Nifty Midcap 100 index up 10% and the Nifty Smallcap 100 index up 11% this month. This rally has come at a critical time, rekindling hope among ordinary investors, who have been essential drivers of the spectacular rise in domestic shares since the COVID-19 outbreak. Despite having reversed their pessimistic attitude, FPIs were net sellers in March. From October to February, they withdrew nearly ₹3 lakh crore, forcing the Nifty 50 and Sensex to fall 15% from their highs. In September, foreign portfolio investors (FPIs) invested ₹15,432 crore.

Why are FPIs returning to Dalal Street?

Rising fears about the U.S. economy slowing in the short term, fueled by Donald Trump’s intensifying trade conflicts, have prompted the U.S. Dollar Index to fall 6%. Analysts think this has curtailed capital inflows back into the United States. Furthermore, the Federal Reserve reaffirmed its prediction of two rate decreases in 2025 this week. Lower U.S. interest rates make emerging nations like India more appealing to international investors.

Another critical factor for FPIs’ large selling in recent months has been high valuations, which has led them to emphasize other emerging markets, such as China, where values are more fair than in India. However, the extended sell-off in domestic equities has reduced valuations to more acceptable levels, reigniting international investors’ interest in local stocks. Harshal Dasani, Research Analyst at Invasset PMS, ascribed the turnaround in Foreign Portfolio Investors (FPIs) selling tendency in March 2025 to various causes, indicating a significant shift in mood.

Appreciating Indian currency: He cited the strengthening of the Indian rupee, which ended at 85.94 per US dollar on March 24, 2025, up 39 paise (1.2%) by mid-March. This, he added, decreases currency risk while increasing profits for FPIs. Drop in the US Dollar: Dasani also noted that the US Dollar Index (DXY) fell from 110.4 in January to 104.1 in March, making developing countries like India more appealing to foreign investors.

Growing risk-on attitude: A positive global risk-on sentiment, fueled by excellent performances in Europe and China, has encouraged FPIs to reallocate to India, which continues to benefit from strong macroeconomic fundamentals and lower inflation. According to Dasani, these facts imply that FPIs are shifting their strategy rather than making a short-term adjustment.

Will the market’s rise hold?

Vinod Nair, Head of Research at Geojit Investments Limited, stated, “The domestic market experienced a robust rally, fueled by value buying as valuations returned to long-term averages and early signs of earnings growth recovery emerged.” Increased government investment and monetary easing are projected to increase confidence in rate-sensitive sectors such as banking, NBFCs, auto, consumer durables, and real estate, potentially contributing to surpass.