Will FPIs continue ‘Sell India, Buy China,’ or is a shift in strategy possible?

The Indian stock market is currently facing significant selling pressure from foreign investors, with major indices dropping by 5%. Concerns over U.S. economic policies and rising interest rates are prompting capital outflows from India, while China is attracting renewed investor interest due to its stimulus measures.

Foreign Portfolio Investors (FPIs) have remained cautious about Indian stocks, continuing their bearish stance in 2025. As of now, they have withdrawn billions of rupees from Indian markets due to concerns about valuation levels, economic growth, and global trade uncertainties. Capital is flowing back to the U.S., fueled by optimism around former President Donald Trump’s economic policies, though concerns over his trade measures, which could trigger short-term inflationary pressures, persist. As a result, investors are diversifying their portfolios, reducing their exposure to emerging markets like India, and investing in U.S. bonds and equities.

Uncertainty around potential U.S. Federal Reserve interest rate cuts in 2025 is also encouraging investment in the U.S., as Trump’s tariff policies are leading to a wait-and-see approach from policymakers. This, in turn, supports higher bond yields and strengthens the U.S. Dollar Index. Meanwhile, the relatively attractive valuations of Chinese stocks have become a headwind for the Indian market.

FPIs have sold ₹36,976 crore worth of Indian shares in February 2025 so far, adding to the ₹87,374 crore sold in January. This brings their year-to-date (YTD) outflows to ₹1.24 lakh crore, as per NSDL data. As a result, the Nifty 50 and Sensex have fallen by 5% in 2025, with the Nifty Midcap 100 and Nifty Smallcap 100 indices plunging by 20%. The continuous selling pressure has also negatively impacted the Indian rupee, which has depreciated by nearly 1.50% this year, making it the second-worst performing currency in Asia after the Indonesian Rupiah.

Can China’s Attractive Valuations Sustain FPI Interest?

In contrast to India, China has recently attracted strong investor interest. The world’s second-largest economy has introduced a series of monetary and fiscal measures, including interest rate cuts and adjustments in housing policies, aimed at reviving the property market.

In late September 2024, China announced its largest stimulus package since the pandemic, leading to an influx of investments into Chinese stocks. Investors are particularly drawn to the lower valuations in China compared to India. The rise of Chinese AI startup DeepSeek, which offers a free alternative to ChatGPT, has also boosted sentiment around technology stocks, especially those listed in Hong Kong.

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted that while the U.S. market has been attracting significant capital inflows following Trump’s victory in the 2024 presidential elections, China has recently emerged as a major investment destination. President Xi Jinping’s new initiatives, in collaboration with leading Chinese businessmen, have sparked hopes of a Chinese economic recovery.

The Hang Seng Index, which tracks Chinese stocks listed in Hong Kong, surged by 18.7% in a month, in stark contrast to the 1.55% decline in India’s Nifty. Experts suggest that the ‘Sell India, Buy China’ strategy may persist due to the attractiveness of Chinese valuations, but caution that this trade has historically fizzled out as structural problems continue to hinder China’s economic revival.

The revival of FPI investment in India is expected when economic growth and corporate earnings show signs of improvement. Such indications are anticipated in the next two to three months, which could prompt a shift back to Indian stocks.

While the ‘Sell India, Buy China’ trend appears to be continuing for now, a shift could be on the horizon depending on economic growth indicators in both countries.