FPI Inflows Hit 8-Month High in May Amid Strong Growth Signals

After eight months of persistent selling, foreign portfolio investors (FPIs) returned strongly to Indian equity markets in May 2025, marking their highest inflows since September last year. A combination of easing geopolitical tensions, improving global macros, and resilient domestic fundamentals has helped reignite FPI interest, bringing a fresh wave of optimism to Dalal Street.

According to data from the National Securities Depository Ltd. (NSDL), FPIs invested ₹19,860 crore in Indian equities through exchanges in May. This comes on the back of ₹4,223 crore inflows in April, signaling a reversal in FPI sentiment that was largely bearish through the first quarter of 2025. The shift has also resulted in a marginal 12 basis point increase in FPI ownership in listed companies, now at 17.5% on a sequential basis.

Dollar Weakness, Global Headwinds Fuel Turnaround

Analysts attribute the renewed inflows to a confluence of factors: the weakening US dollar, prospects of a trade pact with the US, receding Indo-Pak tensions, and better-than-expected corporate earnings in Q4 FY25. “Global cues such as a declining dollar index, and slowing US and Chinese economies are playing in India’s favor,” noted a leading research report. On the domestic front, high GDP growth, easing inflation, and softer interest rates have added to investor confidence.

India's GDP growth of 7.4% in Q4 FY25 has surpassed market expectations, pointing to a strong economic rebound. Experts believe this could pave the way for a robust revival in corporate earnings in FY26. Market observers, however, caution that valuations are becoming stretched, which could lead to intermittent profit booking.

Equity and Debt See Robust Participation

Total FPI inflows into equity and debt combined stood at ₹30,950 crore in May, including ₹12,155 crore in debt instruments. This follows a significant ₹29,044 crore inflow into the debt market in March 2025. Despite the recent momentum, FPIs have cumulatively pulled out ₹92,491 crore from Indian equities so far in 2025, reflecting lingering caution.

The recent resurgence hasn’t been without volatility. On May 21, FPIs offloaded a staggering ₹10,000 crore worth of Indian equities in a single day, rattled by a sudden spike in US Treasury yields and residual Indo-Pak concerns.

Market Trends Show Shifting FPI Strategy

The latest NSE data reveals nuanced shifts in FPI strategy. While their ownership in NSE-listed firms had been on a steady decline since March 2023, barring a blip in September 2024, the trend reversed marginally in Q1 2025. Gains were largely concentrated in private sector banks, where FPIs traditionally hold significant positions.

However, stripping financials from the equation paints a more subdued picture: FPI ownership in other sectors fell by 26 bps to a 13-year low of 15%. Interestingly, FPIs appear to be diversifying, increasing stakes in microcap stocks outside the Nifty 500, hitting a 10-quarter high in this segment. Meanwhile, their holding in the Nifty 50 remained flat at 24.3%, while it declined by 28 bps to 18.5% in the Nifty 500.

Broader Emerging Market Sentiment Positive

India was not alone in attracting foreign capital. All major emerging markets, except Thailand, saw positive FPI flows in May, including Brazil, Indonesia, Malaysia, the Philippines, South Korea, Taiwan, and Vietnam.

Outlook: Volatility in the Short Term, Growth in the Long Run

Despite the resurgence in inflows, experts remain cautious about near-term risks. “Geopolitical tensions, rising US yields, or an earnings slowdown could weigh on sentiments,” said Vaqarjaved Khan, Senior Fundamental Analyst at Angel One Ltd. However, he added, “India’s long-term growth trajectory, fueled by domestic consumption and manufacturing, remains firmly intact.”

With corporate earnings expected to grow at a compounded rate of 14–17% over the next 3–5 years, the outlook for foreign investments remains optimistic. According to Khan, phases of attractive valuations — such as the ones seen in April and May — will likely continue to attract significant foreign capital.

As India cements its position as a preferred investment destination among emerging markets, the May surge in FPI inflows may well be the beginning of a new trend.