A Month of Caution: Understanding the FPI Pullback in November

By Mehul

Introduction

After a brief phase of stability in October, foreign portfolio investors (FPIs) once again turned cautious toward Indian equities in November 2025, withdrawing nearly ₹12,569 crore from the market. This renewed selling marks a continuation of the trend visible throughout much of the year, in which global investors shifted their focus toward economies perceived as at the forefront of the technology and artificial-intelligence boom. As capital increasingly gravitates toward markets like the US, China, South Korea, and Taiwan, regions widely considered leaders in the global AI and semiconductor ecosystem, India finds itself temporarily distanced from the Centre of this thematic investment wave.

The Larger Flow Trend in 2025

The November outflow is not an isolated event. For several months prior, FPIs had been reducing their exposure to Indian equities. July saw heavy selling, followed by an acceleration in August and September as global conditions tightened. October brought a moment of relief with modest net inflows, but this was short-lived, as November began with a reversal. Overall, these movements reveal that foreign investors have adopted a more selective, theme-driven approach, favoring markets deeply integrated with transformative technologies while reducing positions in regions seen as slower to capture AI-led opportunities.

Although India continues to attract long-term strategic interest due to its domestic consumption, stable macro-outlook, and promising demographic profile, short-term flows increasingly depend on global sentiment, technology cycles, and risk appetite. In 2025, this has placed India at a temporary disadvantage compared to countries more tightly connected to high-growth AI industries.

Reasons Behind the Latest Round of Selling

Multiple global and domestic factors intersected to drive the renewed FPI selling in November. The most immediate was the shift in global sentiment. Uncertainty regarding interest rates, geopolitical tensions, and concerns over inflation pushed investors to reduce exposure in emerging markets. In such risk-averse conditions, countries seen as offering stronger alignment with next-generation technologies gained preference, while others saw a pullback.

A second reason relates to how India is currently positioned within the global AI narrative. Analysts have noted that many global funds consider India an “AI under-performer” compared to markets that have deep technology manufacturing bases, advanced semiconductor ecosystems, or strong innovation-driven exports. This perception, whether fully accurate or not, has influenced the pace of FPI flows. At a time when thematic investing dominates global portfolios, investor choices have increasingly aligned with markets that directly benefit from the AI cycle.

Third, global weakness in the technology segment across Asia contributed to broader risk-off behaviour. As tech stocks in several Asian markets corrected sharply, investors reduced overall exposure across the region, including in India. While India’s tech services sector remains strong, it is not seen as a primary beneficiary of the global AI hardware boom, which is where most capital is currently concentrated.

Finally, although India’s corporate earnings for the second quarter showed resilience, especially among mid-cap companies, the cautious global backdrop overshadowed these domestic positives. Many foreign institutions preferred to safeguard profits rather than extend new positions during a volatile global phase.

Impact on Indian Markets

The renewed outflows carry meaningful implications for India’s financial markets. The most immediate effect is reduced liquidity in equities, particularly in the mid-cap and small-cap segments that rely more heavily on foreign participation. Lower liquidity tends to increase volatility, making market movements sharper and more unpredictable.

Valuation dynamics may also be affected. If global investors continue to priorities markets aligned with the AI and tech wave, India could experience a valuation discount relative to peers with more direct exposure to the theme. Although India’s economic fundamentals remain strong, perception often plays a significant role in short-term capital flows.

Another important impact is sectoral divergence. Capital may increasingly favor pockets of the market positioned to benefit from new-age technologies, digital expansion, or manufacturing-led growth. Traditional sectors could see a temporary slowdown in foreign interest. Meanwhile, domestic investors, both institutional and retail, may find attractive opportunities as FPIs exit certain stocks, creating room for long-term accumulation.

From a macro perspective, continued outflows can influence currency behaviour. Sustained foreign selling often places downward pressure on the rupee and may affect external financing conditions. Though India’s foreign-exchange reserves provide a strong buffer, persistent FPI withdrawals can create short-term currency volatility.

How These Changes Have Affected the Market Historically

a. Rotation dynamics over time

• In past cycles, major structural shifts (e.g., from industrials to tech) have driven strong relative performance of new sectors and a reallocation of investor capital.

• The current trend echoes prior structural transitions but with a twist: this time it’s from traditional business models to AI-infused models.

b. Market performance & valuations

• The rise of AI is not simply hype, according to some analysts; this cycle is driven by earnings growth rather than purely speculative valuation expansion.

• That said, historical shifts carry risks: valuations stretched in previous bubbles, and investor rotation sometimes occurs after a strong run in the leading sector.

c. Broader impacts on the market ecosystem

• As investors allocate more to AI/tech segments, other sectors may see relatively lower inflows or even outflows (e.g., commodity-driven, non-tech).

• This rotation can alter market leadership, sector correlations, and risk-return profiles across the market.

What Could Bring FPIs Back?

Despite the recent selling, several factors could encourage FPIs to return to the Indian markets. A strong and broad-based improvement in corporate earnings would be one such trigger. If India Inc continues to deliver steady performance across banking, manufacturing, consumption, and digital sectors, foreign investors may once again increase allocations.

Another potential catalyst is India strengthening its presence in global technology and AI value chains. With increasing policy emphasis on semiconductor manufacturing, digital infrastructure, and emerging tech capabilities, India could gradually shift investor perception. As more of these initiatives materialize, markets may begin to view India as not only a consumer-driven economy but also a tech-forward growth leader.

Global conditions will be equally important. If volatility eases, interest-rate expectations stabilize, and investors regain appetite for emerging markets, India stands to benefit significantly. Given India’s macro stability relative to other developing economies, it could attract renewed attention once thematic pressures ease.

There is also the possibility that valuations in global AI-linked markets become overstretched. If corrections occur in heavily favored markets, investors may rotate back into relatively under-owned markets like India, especially those offering strong long-term growth at reasonable valuations.

Risks Going Forward

Even though a rebound is possible, several risks still hang over the market. Global uncertainty whether from geopolitical tensions or shifting expectations around interest rates may keep foreign investors cautious for now. On the domestic side, movements in inflation, government fiscal signals, and currency trends could further shape how investors position themselves. There’s also a chance that India’s push to strengthen its high-tech ecosystem could take longer than hoped, which might temporarily leave the country out of some major global investment themes.

Furthermore, heavy reliance on domestic investors to support markets during periods of foreign selling could increase vulnerability if domestic sentiment weakens. While India’s retail participation has grown impressively in recent years, it cannot indefinitely replace the scale and depth of FPI flows.

Conclusion

The ₹12,569 crore FPI withdrawal in November reflects the evolving nature of global capital flows in a year dominated by technological disruption and thematic investing. While India’s long-term fundamentals remain intact, the short-term narrative is being shaped by global preferences for AI-driven markets and increased risk caution. The path ahead will depend on how effectively India strengthens its competitiveness in cutting-edge sectors while continuing to deliver robust corporate performance. If these elements align with improving global sentiment, foreign investors are likely to return with renewed confidence. Until then, domestic investors and sector-specific resilience will play a crucial role in stabilizing the market.