The Indian stock market witnessed a reversal in overseas investor activity in early July, as the lack of clarity surrounding the India–US trade deal, stretched valuations, and global trade uncertainty with reciprocal tariffs expected to take effect weighed on FPI sentiment.
After remaining net buyers in the Indian stock market over the last three months, FPIs pulled out ₹5,772 crore in the first four trading sessions of July, remaining net sellers on each day. In June, they invested ₹7,488 crore, and in May and April, they bought ₹19,686 crore and ₹4,223 crore worth of Indian stocks through the exchanges, respectively.
Though FPIs invested over ₹31,000 crore between April and June, the aggressive selling during the first quarter of 2025 more than offset the recent inflows, keeping their overall stance negative for the year so far.
Total outflows now stand at over ₹1 lakh crore. They had withdrawn ₹3,973 crore in March, ₹34,574 crore in February, and a substantial ₹78,027 crore in January.
According to market experts, stretched valuations are among the key reasons behind the shift in FPI stance in early July. The Nifty 50 has rebounded 17% from its April lows, pushing index valuations above long-term averages. At the same time, valuations in other Asian markets are trading at a discount to India, which experts believe could divert FPI inflows away from Indian equities.
The Nifty’s 12-month forward P/E ratio now stands at 21.7x, which is a 5% premium to its long-period average (LPA) of 20.7x. In contrast, its forward P/B ratio is 3.2x, a 14% premium to the historical average of 2.8x.
The 12-month trailing P/E for the Nifty is at 24.5x, above its LPA of 22.8x (a 7% premium). Its trailing P/B ratio, at 3.6x, is also above the historical average of 3.1x, representing a 15% premium. The Nifty is currently trading at a 12-month forward return on equity (RoE) of 15%, above its long-term average.
India’s market cap-to-GDP ratio is currently at 127% of FY26E GDP (up 10.8% YoY), significantly above its long-term average of 87%. It had risen from 80% in FY19 to 132% in FY24 and 126% in FY25, after hitting a low of 57% in March 2020, as per the domestic brokerage firm Motilal Oswal.
Although overseas inflows remain volatile, domestic equities continue to hold firm, supported by strong participation from domestic institutional investors, who poured ₹3.6 lakh crore so far in 2025.
Trade deal and Q1 earnings seen as crucial triggers for FII sentiment
Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, “In the first four days of July, FIIs were sellers every day, with a cumulative sell figure of ₹5772 crores. In the second half of June, FIIs were buyers in financials, autos and auto components, and oil and gas. They were sellers in capital goods and power. There is a trend of profit booking in segments that have done well recently.”
“Resumption of FII buying will hinge on two things: One, if a trade deal happens between India and the US, that will be positive for markets and FII flows; two, Q1FY 26 result indications. If the results indicate earnings recovery, that will be positive. Disappointment on these factors can impact the market and, thereby, FII flows,” he further added.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
