Indian stock market faces longest decline since March, with year-to-date foreign capital outflows nearing historical highs.

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Amid concerns over US tariffs and weak corporate earnings, the Indian stock market is undergoing a sharp sell-off driven by overseas investors. This has led to the Indian benchmark stock index recording its longest streak of consecutive declines in months, while this year’s net outflow of foreign capital is nearing a record high.

According to data compiled by Bloomberg, as of September 26, overseas investors have net withdrawn $16.8 billion from Indian stocks this year, close to the historical record set in 2022. Latest preliminary exchange data shows just this Monday, the net outflow reached $319 million. The sell-off has caused the NSE Nifty 50 index to fall for seven consecutive trading days, marking the longest losing streak since March this year.

The selling wave has intensified further this quarter. Analysts believe that, with the outlook for a US-India trade agreement unclear and Indian stock valuations still too high, the possibility of funds returning is slim. According to CCTV News, US President Trump has imposed tariffs of up to 50%—the highest in Asia—on Indian goods, and sharply increased H-1B visa fees.

This round of capital outflows has also put heavy pressure on the Indian Rupee, making it one of the worst-performing Asian currencies this year and weakening the attraction of local assets. Since 2025, the rupee has fallen more than 3.5% against the dollar, and continues to hover near the historical low of 88.8025 recently set.

Divergence Between Domestic and Foreign Investors: Double Pressure from Valuation and Policy

Pessimism among overseas investors is dominating the market. Charu Chanana, Chief Investment Strategist at Saxo Markets, said: “I doubt foreign fund flows will quickly reverse in the short term.” She believes three conditions are required for sustained capital inflows: clarity over US trade and immigration policies, stability in the rupee exchange rate, and corporate earnings in this fiscal year proving that current valuations are reasonable.

Despite continued capital outflows and selling, valuations in the Indian stock market are still among the highest in the region. The Nifty 50 index has underperformed the MSCI Asia Pacific index for five consecutive months, the longest lag since 2013, but its high valuation remains a key concern for foreign investors.

In stark contrast to the pessimism of overseas investors is the strong buying from domestic Indian institutions. Data shows that while foreign investors are selling heavily, local funds and insurance companies are “catching the falling knife” with unprecedented strength.

So far this year, these domestic institutions have injected a record $66 billion into the market, surpassing the full-year $63 billion in 2024. It is this ongoing domestic buying that has enabled the Nifty 50 index to record a 4.4% gain so far this year, and is expected to achieve its tenth consecutive annual rise.

Passive Funds Show Signs of Inflow While Active Funds Continue to Exit

Although overall foreign capital is flowing out, there is divergence in fund flows. Of note is that passive funds investing in exchange-traded funds (ETFs) seem to be returning. India ETFs listed in the US have seen net inflows for four consecutive weeks, reversing the previous trend of outflows.

This suggests that even as active fund managers like Invesco are reducing risk exposure to India and switching to markets like China, global investors’ demand for passive allocation to India is beginning to recover. Some argue that with valuations recently falling, Indian equities may regain their appeal.

Mixed Performance by Sector: Slow Recovery for Autos, Engineering Sector in the Spotlight

In a complex market environment, investor choices have become critical, and the auto industry is facing a slow recovery.

The Nifty Auto Index has fallen for four consecutive trading days, marking the longest losing streak in over seven months. Although investors hoped cuts in the Goods and Services Tax would stimulate demand, analysts at ICRA warn that high dealer inventories mean the sales recovery will be slow, with only modest growth expected for both passenger and commercial vehicles.

Meanwhile, engineering and capital goods industries have become a focus for investors. According to analysts at Nuvama, India’s continued investment in renewable energy and grid upgrades is expected to keep demand for equipment such as high-voltage transformers strong over the next decade. They believe that sustained demand makes a market downturn unlikely, with companies like GE Vernova, Hitachi Energy, and CG Power set to benefit.

In addition, the performance of the IPO market has added a chill to the market. Bloomberg data shows the BSE index tracking newly listed companies has declined so far this year, while the Sensex main board index has risen by about 4%. Of the 87 constituent stocks in the index, more than one-third are currently trading below their IPO issue price.

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