FII Outflows and Domestic Investor Resilience

FII Outflows and Domestic Investor Resilience in May 2025

Key Points

1. Research suggests Foreign Institutional Investors (FIIs) have shifted from significant outflows to inflows of ₹23,778 crore in Indian equities in May 2025, reversing earlier trends.
2. It seems likely that global factors, such as cooling US inflation and a weakening dollar, are driving this renewed FII interest.
3. Evidence leans toward domestic investors, particularly Domestic Institutional Investors (DIIs), playing a crucial role in stabilizing the market, with notable investments like ₹3,290 crore on May 2, 2025.
4. Sectoral trends indicate strong FII inflows into BFSI and telecom, while IT and auto face outflows, reflecting selective investment strategies.

Overview of FII Trends In early 2025, FIIs withdrew substantial capital from Indian equities, with outflows of ₹78,000 crore in January and ₹35,000 crore in February. However, May 2025 has seen a significant turnaround, with FIIs investing ₹23,778 crore up to May 16, following smaller inflows in March and April. This shift aligns with a broader Asian market trend, where foreign investors returned with $6.22 billion in May, driven by global economic improvements.

Reasons for the Shift The resurgence in FII inflows appears to be influenced by cooling US inflation, with the Consumer Price Index (CPI) rising by just 0.2% month-over-month in April 2025, and a weakening US dollar, with the Dollar Index (DXY) dropping to 100.80. India’s attractive growth prospects, offering a 5-6% risk premium over US returns, further bolster this trend. Additionally, geopolitical calm, such as a US-China trade truce, has enhanced investor confidence.

Domestic Investor Strength Domestic Institutional Investors (DIIs) have been pivotal in maintaining market stability. For instance, on May 2, 2025, DIIs invested ₹3,290 crore, countering earlier FII selling pressure. This resilience, supported by India’s robust economic fundamentals and reform momentum, has created a balanced market ecosystem, cushioning against external volatility.

• The Indian equity market in 2025 has been a dynamic arena, characterized by significant shifts in Foreign Institutional Investor (FII) flows and a robust response from domestic investors. Early in the year, FIIs withdrew substantial capital, contributing to market volatility. However, May 2025 marked a pivotal reversal, with FIIs returning as net buyers, driven by global economic tailwinds and India’s compelling growth narrative. Concurrently, domestic investors, particularly Domestic Institutional Investors (DIIs), have demonstrated remarkable resilience, stabilizing the market during periods of FII outflows. This article provides a comprehensive analysis of these trends, exploring the drivers of FII inflows, sector-specific investment patterns, the role of domestic investors, and the long-term outlook for India’s equity market as of May 25, 2025.

Sectoral Preferences FII investments in May 2025 have favored sectors like Banking, Financial Services, and Insurance (BFSI) with ₹31,104 crore and telecom with ₹16,235 crore, while IT and auto sectors saw outflows of ₹23,600 crore and ₹42,600 crore, respectively. This selective approach highlights FIIs’ focus on sectors with strong growth potential.

Reversal of FII Outflows

The Indian equity market experienced significant FII selling in early 2025, with outflows totaling over ₹1.7 lakh crore from October 2024 to early 2025, including ₹78,000 crore in January and ₹35,000 crore in February (FIIs pump ₹23778 crore). This selling pressure led to market corrections, particularly in mid-cap and small-cap segments. However, a notable turnaround began in April 2025, with FIIs investing ₹6,065.78 crore on April 15 and totaling ₹10,559 crore by April 29 (Have FIIs Returned). This momentum continued into May, with FIIs infusing ₹23,778 crore up to May 16, following ₹4,243 crore in April and ₹2,014 crore in March.

This reversal is part of a broader trend across Asian markets, where foreign investors returned with $6.22 billion in equities in May, including $1.68 billion in India, reversing outflows of $54.33 billion from January to April 2025 (Foreign investors return). Several factors have driven this shift. Cooling US inflation, with the Consumer Price Index (CPI) rising by only 0.2% month-over-month in April 2025 and year-over-year inflation slowing to 2.3% from 3.5% in October 2024, has rekindled hopes for Federal Reserve rate cuts (FII flows poised). The weakening US dollar, with the Dollar Index (DXY) dropping from ~104 to 100.80, has also made emerging markets more attractive. India’s structural growth, offering a 5-6% risk premium over US returns, combined with geopolitical calm, such as a 90-day US-China trade truce, has further bolstered investor confidence (FPIs pump ₹18620 crore).

Sector-wise Investment Trends

FII inflows in May 2025 have been selective, with significant investments in certain sectors and continued outflows in others. The Banking, Financial Services, and Insurance (BFSI) sector has attracted ₹31,104 crore over March and April 2025, while telecom has seen inflows of ₹16,235 crore over the past five months, and chemicals have received ₹4,606 crore over eight months (FIIs pump ₹23778 crore). Conversely, the IT sector faced outflows of ₹23,600 crore in March and April 2025, and the auto sector saw ₹42,600 crore in outflows over the nine months leading to April 2025.

The “India Playbook 2025” provides further insights, highlighting top-performing sectors such as Auto, driven by demand recovery and easing input costs; Capital Goods & Industrials, benefiting from a capex wave; and Pharmaceuticals & Chemicals, supported by global demand and the Make in India initiative (India Playbook 2025). Underperforming sectors include Real Estate & Building Materials, affected by lower B2C activity; Technology, impacted by a global IT slowdown; and Paints, facing margin pressures. The following table summarizes these trends:

The outlook recommends selective exposure to consumption plays, following government tax cuts of 3–5% for ₹15–25 lakh earners, expected to boost spending by 3QF2026, as well as financials and capex-linked sectors.

Domestic Investor Resilience

Domestic Institutional Investors (DIIs) have been instrumental in stabilizing the Indian equity market amidst FII volatility. On May 2, 2025, DIIs invested ₹3,290 crore, significantly boosting market sentiment (Have FIIs Returned). This reflects a broader trend where DIIs and retail investors have increased their influence, creating a balanced ecosystem that cushions against external shocks. India’s economic resilience, driven by reform momentum, earnings visibility, and improving macro fundamentals, has bolstered domestic investor confidence. Forex reserves have rebounded to ~$624B, banking liquidity has shifted from a ₹3T deficit to a Rs 1.3T surplus, and capex has revived, supporting market stability (India Playbook 2025).

Long-term Outlook

The long-term outlook for FPI flows into India remains positive, supported by global factors like potential US rate cuts and a weakening dollar, alongside India’s strong fundamentals. The country’s young demographic, rising consumption, and ongoing formalization continue to attract global capital. However, geopolitical tensions, such as the India-Pakistan conflict, and prolonged trade negotiations could introduce volatility. The resilience of domestic investors ensures a stable investment environment, positioning India to potentially reach new market peaks if global cues remain supportive.

Conclusion

The reversal of FII outflows in May 2025, driven by global economic improvements and India’s growth story, has been complemented by robust domestic investor resilience. Sectors like BFSI and telecom have benefited, while IT and auto face challenges. The interplay between FII flows and domestic investor activity will shape India’s equity market trajectory, with cautious optimism for sustained growth in 2025.

Key Citations

• FII flows poised for momentum as US rate cut expectations rise