It appears that foreign portfolio investors (FPIs), who were aggressively buying Indian equities in April and early May in the cash segment, are now turning cautious and potentially selling at higher levels.
FPIs’ buying of Indian equities stood at a meagre ₹135.98 crore on May 26, even as the Nifty 50 closed with a healthy gain of 0.60 per cent. They are still net buyers of Indian equities worth nearly ₹12,328 crore in the cash segment this month. However, the trend over the last several sessions indicates that the momentum is losing steam.
The Indian stock market’s stretched valuation and mixed Q4 results could be the key factors behind FPI selling at higher levels. However, the dollar’s weakness seems to have capped the foreign capital outflow.
As the Indian stock market navigates a plethora of uncertainties related to US President Donald Trump’s tariff policies, the interest rate trajectory of the US Federal Reserve, and global economic growth, it seems difficult to predict whether FPIs will continue pouring money into the Indian stock market in the short term.
Will the Indian stock market suffer a deep crash in case of an FPI selling?
While FPI selling could weigh on Indian stock market sentiment, it is unlikely that the domestic market will see a deep crash. This is because of the bright growth outlook of the Indian economy.
Five key factors that may keep the Indian stock market resilient in FY26 amid FPI selloff
1. Healthy monsoon
The monsoon is expected to remain above normal this season. Monsoon winds hit the Kerala coast on May 24, eight days before the normal date of 1 June.
A healthy monsoon is not only positive for the agriculture sector, which contributes about 18 per cent to India’s economy, it also augurs well for allied sectors, such as rural consumption, FMCG and automobiles.
2. RBI’s bumper dividend
The Reserve Bank of India (RBI) announced on Friday, May 23, that it will pay ₹2.69 lakh crore as a dividend to the central government for FY25. This is the highest-ever surplus that the central bank will pay to the government.
RBI’s dividend will help the government maintain its fiscal deficit, which will build momentum for economic growth, strengthen the currency, and possibly fetch ratings upgrades and more foreign investments. All this will augur well for the stock market.
“RBI’s bumper dividend payment to the government, exceeding the budget estimates, will help contain the fiscal deficit target for FY26 at 4.4 per cent. This, in turn, can sustain the low inflation and declining interest rate trend, which will continue to support the equity market,” said VK Vijayakumar, Chief Investment Strategist, Geojit Investments.
3. The benefits of tax relief will be visible going ahead
Experts say the benefits of income tax relief announced in the Budget 2025 will be visible after the second half of this fiscal year. The increase in disposable income could mean more spending on goods and services. Increased consumption and demand could give a significant boost to the Indian economy and underpin stock market sentiment.
4. Favourable inflation-growth dynamics
India’s retail inflation touched a six-year low of 3.16 per cent in April, marking a third consecutive month of sub-4 per cent print. Retail inflation is expected to remain at comfortable levels amid easing geopolitical concerns and a healthy monsoon.
On the other hand, the Indian economy is expected to keep growing at a healthy pace. Despite global chaos, the Indian economy may grow slightly above 6 per cent in FY26.
Morgan Stanley upgraded its forecast for the Indian economy to 6.2 per cent year-on-year for FY26, up from 6.1 per cent and 6.5 per cent for FY27, up from 6.3 per cent.
Meanwhile, NITI Aayog Chief Executive Officer (CEO) BVR Subrahmanyam said India has overtaken Japan to become the world’s fourth-largest economy. He further said that in another two to three years, India may surpass Germany and become the third-largest economy in the world.
5. Strong influx of retail investors
As of May 26, the total number of investors registered with the BSE stood at nearly 21.68 crore, up about 25 per cent year-on-year. A strong influx of retail investors has been a key reason that has helped the domestic market avoid any major crash during periods of heavy foreign capital outflow.
“New retail investors continue to pour into the domestic markets. Last week also over six lakh new investors entered the capital markets for the first time. Thus, we firmly believe that the outlook for the Indian equity markets remains optimistic,” said G Chokkalingam, Founder & Head of Research, Equinomics Research Private Limited.
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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.
