The Indian stock market is plunging. Sensex and Nifty have been on a declining trajectory. The equity market in India is down and It’s happening because Foreign institutional investors (FII) and Foreign Portfolio Investors (FPI) are taking out thousands of crores of capital from the Indian market.
The Indian stock market has been witnessing a heavy foreign capital outflow. Foreign institutional investors or FII and FPI have aggressively sold Indian equities in 2025. For instance Business Standard reported on 22nd May that the rupee fell to 85.70 per dollar (Link) as FPI is continuously selling in India ( Mint reported that foreign institutional investors offloaded nearly 4800 crores of shares from 19th May to 23rd May, Link) . This foreign investment outflow has also put pressure on the Indian rupee that has weighed on domestic investors sentiment and the mutual funds industry. And if you think foreign institutional investors don’t affect the common man of India, think again. Because every time foreign institutional investors pull out thousands of crores from the Indian market, the market bleeds red, the value of rupee drops, and your mutual fund shrinks overnight.
This is the reason why every time foreign institutional investors enter or exit the Indian market, it becomes national news. Every single newspaper has front page headlines and there is a raging debate in the parliament. So as students of economics we need to understand why are foreign institutional investors are so important for India? How do they move everything from growth to the value of our currency? Why are they quitting the Indian market? What are the problems with the Indian economy? And most importantly is your money in trouble?
Let’s start with the basics. Who really owns the Indian stock market? You might think it’s LIC or SBI mutual fund or even millions of retail investors like you and me. But here’s the cold truth.
Promoters like Ambanis and Adanis own 51% of the market. Foreign institutional investors own 16%. Domestic institutional investors like LIC and SBI mutual fund own 26 %. And retail investors like you and me own just 17%. That’s right.
Foreign institutional investors own less than 1/5th of the Indian stocks and yet when the FIIs sneeze the entire Indian market catches a cold. Do you believe this is an India specific thing or is it being sold out of as a basket because of the poor returns for the last many years? The fall that we have witnessed in the Indian markets.One of the biggest factors has been the relentless selling from the FIIS in the Indian in the cash market. There has been a significant outflow of funds by FII. This is the third consecutive week that Nifty has underperformed its global peers. We’ve closed lower and major the reason is that FII flow is moving out of India.
Foreign investors have historically been a significant source of capital for the Indian market. In October alone they pulled out a staggering close to about 95,000 cr. So the question is if they own so little how do they move the market to such a large extent? And more importantly, did India make a mistake by letting these foreign institutional investors in?
Well, let’s understand what fuels their power in the Indian economy. Let’s say a foreign fund wants to invest 1,000 crores in Indian stocks. Now, they don’t carry rupees in suitcases. They come with dollars in this case, it would be $120 million or 1,000 cr rupees. Now, to buy Indian
shares, they need to convert these dollars into rupees and when they buy Indian rupees in exchange for US dollars, it creates demand for the Indian rupee in the forex market. As
We all know, more demand for rupees means the rupee becomes stronger. Before the FII inflow, if $1 equal to 83 rupees after lakhs of crores get poured in by the FII, the rupee demand spikes and the inflow could cause $1 to be equal to 81 rupees. Now when the rupee appreciates from 83 rupees to 81 rupees If a barrel of oil costs $100, earlier we had to pay 8,300 rupees but now we only have to exchange 8,100 rupees. And when oil and imports become cheaper, what happens to inflation? Inflation slows down. The best part is when these dollars come in, RBI also gets more foreign resources and this directly makes our country safe for exports. So when FII comes in, RBI gets stronger, India looks safer and the rupee stands tall. This is the first advantage of having more foreign institutional investors.
Secondly, the FIIs actually make you rich and they make India run faster. Now the question is how does it work?
Well, let’s say HDFC bank stock is sitting at 1,000 rupees. Suddenly foreign sharks like Black Rock enter the market and they pour in thousands of crores in capital and this capital is deployed to buy HDFC shares in huge blocks. Now what will happen? Demand for HDFC stock shoots up and HDFC stock goes from 1,000 rupees to 1,300 rupees. So if you were holding 100 shares of HDFC, you just made 30,000 rupees in profits instantly. Now multiply that by millions and you will see that all mutual funds holding HDFC like SBI mutual fund and KOTAK mutual fund will see their portfolios go up by 30%. This is how a bull run is driven by foreign institutional investors.
When we say they make India run faster the classic example is Reliance in 2020. If you remember Reliance raised 1.65 lakh crores not through loans but by selling stakes in Jio and Reliance Retail to Facebook, Google, Abu Dhabi Investment Authority and Silver Lake Capital. Deals were pouring in and funds were rolling in for Reliance Geo. Reliance Industry share prices rallied after Facebook announced investments of $5.7 billion in Reliance Geo. Another company announced a huge investment after Facebook now Google is also going to invest, Abu Dhabi investment authority uh that will be investing nearly around 5,684 cr rupees into geo platforms for around 1.16% stake. Where do you think the stock is headed given that the Facebook deal is already out in the open? The right issue is something we all know and on top of that there is another investor in the geo platform. If you think about it, that’s more than the combined GDP of many countries today and with this massive capital of 1.65 lakh crores. They launched Geomart, expanded geo fiber, built 5G infrastructure and made Jio completely debt free. So that wasn’t just a funding round. It was a national digital transformation fueled by foreign capital.
So when foreign institutional investors pour in money, they set off a chain of reactions that can make you richer, it could make Indian companies stronger and it could push the entire economy forward. Then comes the third superpower that the foreign institutional investors bring to the table and this is high governance standards. In simple words, before investing, a US pension fund will often ask critical questions to Indian companies like is this Indian company transparent? Does it follow global accounting standards? And they will even check if there are independent directors on the board. And when companies like Infosys and TCS adhere to these high governance standards, they set benchmarks for the entire Indian market to follow. This is how world-class governance becomes a benchmark for all Indian companies.
So all of this put together each dollar of a foreign institutional investor strengthens our currency, funds our future and makes India lucrative for the world. This is how important foreign institutional investors are for India. So now the question is why are these foreign institutional investors leaving India?
Is there something wrong with the Indian economy or is the government doing something terrible that we don’t know about? Because if you look at it from the outset, everything looks fine. Our GDP is one of the fastest growing GDPs in the world. The stock market is nearly at an all-time high and the government is already stable and popular. Then what exactly is wrong with India?
Well, the first problem is that Indian stocks are expensive right now. And how do you measure whether a stock is expensive or not? It is measured using something called the price to earnings ratio. Now think of it this way. If one company has one share priced at 100 rupees and it earns a profit of 10 rupees per share, then its PE ratio would be 100 divided by 10 equal to 10. But if another company also earns 10 rupees profit per share, but this company’s shares trade at 300 rupees per share, then the PE ratio of this company would be 300 divided by 10 equal to 30. So if you do the math, both the companies are giving the same amount of profit. But the catch over here is that you are paying three times more to buy the share of the second company. And this is the reason why low PE ratio markets like China and Brazil often look more attractive when global investors are hunting for value and compare it to markets like India.
Now look at this. As of May 7th, 2025, while China’s PE ratio stands at 10.87, Brazil is at 10.76. Japan is at 16.20. The UK is at 19.45 and India is at 23.88. only the US is greater than India at 25.72. So on the surface a lower PE ratio often signals a cheaper market which many investors instinctively prefer. Whereas if you look at higher PE ratio markets like India, these markets can sometimes push investors away especially when growth expectations don’t seem strong enough to justify the premium. This is how investors draw a comparison of the international markets.
India is the world’s fastest growing economy. The Indian stock markets are in record high territory. Now, before the recent fall, the Nifty50 price to earnings ratio, PE ratio was over 24, which makes the Indian market slightly overvalued compared to other emerging economies. As global markets offer far more attractive valuations, FIIs are shifting their focus to other emerging markets like China and Japan. So, are the FIIs angry? Not at all. They’re just doing what investors always do when the numbers don’t add up. They move to a different market, take their profits out, and they wait for prices to cool off.
Let’s talk about another problem that you will deeply resonate with, which is the problem of tax in India. Now, imagine being a foreign investor in India. As of FY 25, if an FII makes a profit in the Indian stocks, here’s what happens. 12.5% long-term capital gains tax if they hold for over a year. 15% short-term gains tax if they exit before 12 months. And on top of it, they’re also charged a security transaction tax on every trade whether they make a profit or a loss. That’s another silent deduction of 0.1% to 0.001% on every trade. So if an FII invests 100 crores in India, they could lose 13 to 14 crores to just taxes even before thinking about profit. Add this up with rupee depreciation and you will realize that it’s not worth investing in India when in Hong Kong and Singapore they need to pay zero tax on capital gains. The Indian stock market has been in a bit of a rough patch lately and one of the biggest talking points of this is foreign investors’ exclusion .
The Capital Gains tax in India particularly for foreign investors is 100% wrong. When foreign investors invest in the US UK, they don’t have to pay tax. When you invest in India, these
Foreigners, India takes 20% or 15% tax and it cannot be recovered. And this is what brings us to the third problem which are the scary indicators of the Indian economy.
Now listen to this very very carefully because this affects you, me and every other citizen in India. Look at this. Rural consumption powers nearly 60% of India’s GDP and real rural wages have actually contracted in the last 25 to 27 months and the housing financial savings have dropped to 47 years low at just 5.1% of the GDP. So in short in India people have less cash, they have fewer savings and there is nothing left for a rainy day. So when incomes fall what happens? people borrow. In fact, if you look at this chart, in FY24, Indian household debt hit 41% of GDP. And in early FY25, it crossed 43.5%. Now, stack that up with food inflation at 8.4%. And you will see an economy that’s running on EMI and not real income. Indian households are seeing their savings dwindle and debt burden rises. Household savings have hit a 47-year low, dropping to 5.1% of the GDP. This means that EMIs and fixed deposit rates are set to rise. Indians are taking more loans and they’re saving less.
Food inflation has dropped to just 3.75%. Surge in inflation is forcing people to dip into their savings and borrow more to fulfill their consumption needs.
India’s equity market saw a strong comeback from foreign institutional investors who infused 14,670 crores in April 2025. But just as FII started coming back, geopolitics struck again. Well, Pakistan and India exchanged fire across their border overnight. Islamabad launched a military operation into India using missiles. New Delhi responded with reciprocal strikes against targets in Pakistan. Tensions on the border are spilling over to the markets and the impact is visible.. On 9th of May 2025, Indian shares fell over 1% after Pakistani drone and missile attacks happened in India. The Nifty dropped and the rupees started weakening. So while FII love India’s growth story, global realities often force them to flee at the first sign of instability. And this is the brutal truth. Even when FII wants to stay, the geopolitics and the volatility won’t let them. And this is a problem that needs to be solved by the world and not just India. And no investor in the world wants to bet on a consumer who’s drowning in debt while he’s barely buying food. This is the third challenge that the FIIs are facing. And if you’re wondering how to protect your money while the market crashes and the FIIs exist, just remember one simple rule. Don’t keep all your money in stocks. Smart investors always keep a part of their portfolio in safe fixed income options like Bonds because Bonds don’t crash with the market and they often give you stable returns even in bad times. What can the Indian government do to fix this? Because as we all know FIIs are vital boosters to the Indian economy and when FIIs walk out, India doesn’t just lose capital, we lose market momentum, we lose global credibility and we lose the foreign
reserves. Because FIIs don’t just bring money, they bring belief. When they stay, the world sees India as investable. When they leave, the headlines scream and the markets panic. So what should the Indian government do to bring back foreign institutional investors?
Well, the answer is pretty simple, boring and it’s the same old answer that we have said in multiple case studies. Firstly, we need to fix the ease of doing business. Because foreign investors don’t only chase returns, they chase speed and scalability. Why? Because profit doesn’t come from potential. It comes from an ecosystem where businesses can launch fast, scale faster, and face minimal friction. And if you look at India, we rank 63rd in the world for ease of doing business. And if you want to know the details and the pain that has caused to all the entrepreneurs in India, you should just talk to any businessman who set up a manufacturing plant in India and you will know the disaster of the Indian business ecosystem firsthand ( We have seen so many examples in recent times such as a linkedin post where a exporter face stark adverse situation and unwelcoming nature of attitude of an official in the ministry, and for that reason he lost a great contract and there are so many occurrence like that ). So we need to fix the ease of doing business in India.
Secondly, we need to fix judicial efficiency. And did you know in India it takes 1,445 days as in nearly 4 years to resolve a basic business contract dispute. And if you look at the world standards, Singapore stands at 164 days, Vietnam stands at 400 days, and even Brazil stands at 801 days. This isn’t just inefficiency, it’s a black hole for capital. While courts drag cases, the capital sits idle and when capital waits, the profits vanish. So why would any FIIs money come in a country where it could get stuck in court cases for four long years? This is the second problem that the government needs to act on immediately.
Lastly, we need to stop punishing our investors with taxes and build manufacturing muscle. Right now, manufacturing makes up just 17% of India’s GDP. In Vietnam, it’s 24.8%. In China, it’s 27%. And even with make in India, we aim to take manufacturing to 25% of our GDP and we are nowhere close. The beauty of manufacturing is that every time India builds a factory, we move one more portion from agriculture to the middle class and this shift does everything. It grows the middle class, It increases consumption, It increases the profits of companies. And all of these lead to higher returns for the FIIs. So when India builds factories, we’re not just building GDP we’re building investor confidence because growth on paper is good. But growth on the ground is what global capital demands.
This is the story of FIIs. Why are they important for India and what do we need to do to have them in our Market.
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