Clipped from: https://www.thehindubusinessline.com/opinion/editorial/selling-season/article70403312.ece
Deft management of rupee can spur FPI flows
Rupee: Weakening trend | Photo Credit: Muralinath
The year 2025 has been marked by relentless selling by foreign portfolio investors. They have net sold ₹1.61 lakh crore of Indian equity this year. The selling began in the last quarter of 2024, as pricey valuation of Indian equity made foreign funds gravitate towards other emerging markets such as China, Taiwan and South Korea. While there was a hiatus in the second quarter of 2025, the selling resumed in July as the US slapped heavy tariffs on Indian exports. FPIs have been net sellers in 141 out of 234 trading sessions in 2025; the second highest in two decades.
That said, there are several reasons why the FPI selling is unlikely to impact Indian equity markets too much. One, domestic institutional flows have been at a record ₹7.2 lakh crore so far in 2025. Consistent SIP inflows into mutual funds and money from insurance and pension funds continued to flow into the equity market. Domestic individual investors remain active, helping prevent a sharp slide in prices. These domestic flows have helped take the Nifty50 9 per cent higher since the beginning of this year. Two, the out-performance of stocks in other emerging markets such as South Korea, Brazil, Mexico, China and Taiwan in 2025 has helped reduce the gap in valuation between India and these markets. As a result, Indian stocks appear more competitive now. Three, the FPI sell-off appears largely led by a perception of the negative impact of the US tariffs on earnings of Indian companies. With companies reporting strong growth in earnings in the third quarter of FY25 and the exports numbers for November displaying buoyancy, the sentiment towards India could undergo a change.
While the equity market is well placed to weather this fund outflow (largely on account of sentiment), the impact is seen on the currency. The rupee is already down 6 per cent against the dollar this year, and down by a far higher 20 per cent against the Euro and 14 per cent against the pound , largely due to FPI fund outflows. A vicious cycle may well be at work, where the currency weakness triggers FPI outflows, leading to more of the same. Of concern is the fact that foreign portfolio investors have begun pulling money out of debt markets too. While ₹70,686 crore had come into Indian debt market through the global bond indices, these flows turned adverse in December. Net outflows of ₹8,587 crore were recorded through the fully accessible route in December. The stress on Centre’s finances due to lower tax revenue as well as currency depreciation could be weighing on these flows.
Subtle management of the rupee could stem some of this outflow. The Reserve Bank of India (RBI) has been intervening judiciously in the foreign exchange market so far, and should continue in the same vein. However, RBI should not actively defend the currency, or be seen to be doing so.
Published on December 16, 2025
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