By Sandeep Parekh
The Reserve Bank of India (RBI) Bulletin for March 2025 noted sustained foreign portfolio investment outflows exerting considerable pressure on equity markets and aiding weakening of the rupee. Data from the National Securities Depository Limited suggests foreign portfolio investors (FPIs) sold equities worth Rs 1.12 lakh crore in February, and outflows continued at Rs 30,015 crore in March. The trend has persisted since last year. With the tariff wars, this situation has aggravated further. The number of registered FPIs declined for the first time in a year, dropping from 11,761 in December 2024 to 11,729 in January. As a consequence, the rupee depreciated by 0.9% month-on-month in February, highlighting the broader macro-financial implications of sustained capital outflows.
FPIs’ reduced exposure to Indian markets has been influenced by domestic and global developments. India’s economic growth has moderated, and corporate earnings — particularly among Nifty 50 companies — are robust but have remained relatively subdued over the past few quarters. Against the backdrop of relatively high market valuations, this has somewhat tempered investor appetite. The rupee’s depreciation has also affected return expectations for foreign investors, as currency conversion becomes less favourable. Broader global concerns, including uncertainty around the US economic outlook and trade tensions, have prompted a more cautious approach toward emerging markets like India. This shift in sentiment has contributed to notable FPI outflows, particularly from sectors such as IT, financial services, and consumer goods. FPIs are critical for the health of financial markets, as they enhance liquidity, support asset prices, and contribute to currency stability by increasing the supply of foreign exchange. However, when FPIs withdraw, the demand for foreign currency rises, leading to depreciation of the local currency. These outflows can trigger market volatility, depress asset prices, and tighten liquidity, posing broader challenges for macroeconomic management and policy response.
While the exit of FPIs may be attributed to geopolitical developments, broader macroeconomic trends, or a strategic rebalancing of global investment portfolios, the absence of ease in investment norms also appears to have been a contributing factor.
In August 2023, the Securities and Exchange Board of India (Sebi) came out with key regulatory interventions introducing additional disclosure requirements for FPIs. FPIs meeting the specified threshold were required to provide granular ownership details, including a full look-through disclosure up to the level of all natural persons holding any ownership, economic interest, or control. The circular did not impose any restriction on investments but sought greater transparency from FPIs making large investments in a single group of companies. It required disclosure of the ultimate beneficial owner — the individual behind the investment. The requirements did not appear overly burdensome, with sufficient flexibility built into the framework, and initially impacted only a small number of FPIs.
However, Sebi also adopted a proposal to extend disclosure requirements to offshore derivate instrument (ODI) subscribers and ODI-issuing FPIs through a circular dated December 17, 2024. As a result, greater compliance and monitoring obligations have been placed on ODI-issuing FPIs and their designated depository participants. These entities must now track investor thresholds, submit daily position reports, and monitor group entities that exercise significant control over ODIs, strengthening oversight and transparency in the ODI space. Unlike direct FPIs, ODI subscribers were not previously required to disclose their ultimate beneficial ownership. In response, Sebi has adopted a proactive stance, issuing a series of circulars aimed at addressing emerging risks, enhancing transparency, and strengthening compliance within our securities market.
The regulatory tightening coincides with a period of shifting FPI sentiment. In certain cases, the inability to furnish the requisite data — often due to unavailability — has resulted in the forced exit of some FPIs from the Indian market. This must be addressed immediately. In fact, the first set of deadlines for some of them is as early as May, and the forced exit of clean FPIs from India can’t adequately be highlighted.
Specifically, Sebi should do two things. One, delay the timelines for implementing the new norms to beyond 2026 (assuming the volatility of trade wars will subside by then). Two, it should use its exemptive authority for FPIs who cannot find out the last human being in an investment, which can be a real challenge if the investors number hundreds and many are listed firms or the like, whose ultimate beneficial owner cannot be fairly obtained. This clearly is the worst time to get rid of clean money and make FPIs to divest.
Sebi and the RBI play key roles in maintaining financial stability and investor confidence to counteract FPI outflows. Sebi can review and ease investment norms where appropriate while maintaining transparency. It can also engage with global investors to address concerns and clarify regulatory expectations. Investors seeking less restrictive regulatory environments may redirect their funds to other markets. While Sebi’s broader objective of enhancing oversight and addressing regulatory arbitrage is well-intentioned, the practical implications of such measures warrant thorough deliberation. Striking a balance between regulatory rigour and market competitiveness will be crucial to sustaining India’s appeal as an investment destination.
Similarly, the RBI can intervene in the foreign exchange market to manage excessive currency volatility, ensure adequate liquidity in the banking system, and maintain orderly market conditions through monetary policy tools. On the other hand, the broader responsibility for sustaining foreign investor interest lies with the government, which must maintain macroeconomic stability, ensure policy predictability, and foster a favourable investment climate through structural reforms and sound fiscal management. A coordinated approach between regulators and the government is essential to effectively manage capital outflows and strengthen investor confidence.
Key drivers of FPI inflows include strong economic fundamentals — such as robust GDP growth and low inflation — which signal long-term stability. Policy consistency, regulatory clarity, and simplified investment norms further support a positive investment environment, while attractive market valuations offer potential for higher returns. Together, these elements shall make India a compelling destination for foreign investors seeking both growth and security.
Disclosure: the firm has adviced FPIs with respect to disclosures discussed.
Co-authored with Manas Dhagat and Pranjal Kinjawadekar, associates, Finsec Law Advisors
The writer is managing partner, Finsec Law Advisors.
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