Context:
• As of 4 November 2025, FPIs have sold ₹1.5 lakh crore in Indian equities — largest sell-off in ~20 years.
• Triggered by fading benefit of China-to-India reshoring narrative and relatively high valuations.
• Concerns over corporate earnings stagnation and structural economic risks.
Key Highlights:
- Drivers of FPI Withdrawal
• India benefited earlier from investors exiting China → inflow boost.
• High Price-to-Earnings (PE) ratio (~22x) → Indian equities perceived expensive relative to global peers.
• Flat corporate earnings over past 4–6 quarters; forward earnings growth projected 10–11%, below investor expectations. - Divergent Expert Views
• Some analysts: valuations returning to long-term average, may support market rebound.
• Realistic earnings growth aligned with single-digit nominal GDP growth tempers expectations.
• Consensus: revival of FPI participation requires corporate earnings growth 15–20% or significant valuation compression. - Impact on FDI and Economy
• Net FDI trends lower; total foreign investment as % of GDP at 25-year low (2024–25).
• Persistent low corporate performance → reduces private capital expenditure, household income growth, and lending growth.
• Government infrastructure and household transfers partly offset slowdown.
• World Bank (WDR 2024) warns of risk of “Middle Income Trap” without institutional reforms. - Structural Challenges
• Low corporate profitability and sluggish private sector growth limit sustainable domestic demand.
• Policy reforms needed to maintain India’s trajectory towards high-income economy.
• De-globalisation trends exacerbate structural risks.
Relevant Prelims Points:
• FPI (Foreign Portfolio Investment) → passive investment in equity/bonds; sensitive to market sentiment.
• FDI (Foreign Direct Investment) → equity investment in businesses, long-term commitment.
• Middle Income Trap → emerging economies stagnate at middle-income levels without reforms.
• PE ratio = Price/Earnings; high PE → potentially overvalued equity.
Relevant Mains Points:
• FPI trends reflect market confidence, not just macroeconomic fundamentals.
• Need for corporate earnings growth + structural reforms to sustain capital inflows.
• GS3 links → Capital markets, investment climate, private sector performance, macroeconomic stability.
• Way Forward:
– Boost corporate earnings via reforms, incentives, ease of doing business
– Institutional strengthening to attract FDI & retain FPIs
– Diversify investor base; reduce dependency on volatile portfolio inflows
– Policy stability + credible governance → reduce risk perception
UPSC Relevance (GS-wise):
• GS3 – Indian economy: capital markets, FDI/FPI flows, investment climate, macroeconomic stability.