Indian stock markets are tumbling, and whether you’re a trader or just a bystander, you’ve probably caught the whispers of panic.

So in today’s Finshots, we tell you the why behind it and how you still can be hopeful.

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The Story

Last year at a gathering, a friend couldn’t stop raving about his stock market gains. The returns seemed way beyond what the Indian markets were typically offering. My first thought? Where’s the money parked? So, I asked. His answer, “All in stocks, mostly in small and midcaps. No fixed income investments, no gold, and barely any cash on hand.” And right then, I had a gut feeling that this story wouldn’t have a happy ending. We were already deep into a bull market, and he was going all in.

What does this have to do with FIIs, the recent market crash, or even you? We’ll get to that. But first, let’s talk about the markets and the foreign investors pulling the strings.

Since October last year, Indian stock markets have been slipping. The Sensex and Nifty are down about 15% from their peaks, wiping out lakhs of crores in value. And it’s not just the big stocks, broader markets are feeling the pain too. According to the Economic Times, 321 of the 938 companies in the BSE Smallcap index have dropped over 20% in just one month, while 243 companies now trade at less than half their 52-week highs. Moneycontrol paints a similar picture for the broader NSE 500, where nearly 400 stocks have lost between 20% and 50% of their value.

One of the biggest culprits behind this sell-off?

Foreign institutional investors (FIIs) making a run for the exit. In 2025 alone they’ve already yanked out a staggering ₹1.5 lakh crores. Think of the Indian market as a ₹100 pool, with FIIs holding a hefty chunk. When they start pulling their money out, let’s say ₹20, that ₹100 shrinks to ₹80, dragging the market down, unless fresh buyers step in to fill the gap.

And why are FIIs moving their money out?

Well, a few things.

For starters, Indian markets aren’t as attractive anymore. If you were a foreign investor looking for returns, you’d compare India to global markets. In 2024, the US stock market delivered 23% returns. Europe ranged between 7-18%. The Middle East topped at 26%. Even Japan and Hong Kong gave 15-19%. But India, a mere 8%.

Now, that might make you think, ‘Okay, maybe 2024 was bad. What about 2025?’ But even here, the outlook isn’t great. Markets are already trading at high valuations, leaving little room for growth. As Aswath Damodaran puts it:

The most expensive market in the world is India, and no amount of handwaving about the India story can justify paying 31 times earnings, 3 times revenue and 20 times EBITDA, in the aggregate, for Indian companies.

This simply means that the upside potential is limited. Plus, India barely makes a dent in the MSCI World Index, which dictates global fund allocations. So, for FIIs, India just isn’t as appealing right now.

Then you have taxation woes. In most global markets, FIIs pay zero tax on stock market gains. But in India, they’re now subject to a 12.5% tax on equities held for over a year (long-term capital gains or LTCG) and a 20% tax on short-term capital gains (STCG). A quick back-of-the-envelope calculation here will tell you that if an FII invests ₹100 and earns ₹10, they lose ₹1.25 to LTCG or ₹2 to STCG. So why park money in India when they can keep more profits elsewhere?

And finally, the depreciation of the rupee eats into their returns. Look, when FIIs invest in India, they first convert their dollars to rupees. But over time, the rupee tends to lose value. In 2024 alone, it weakened by about 3% against the dollar. This means that even if an FII earns a solid 12% return in rupee terms, currency depreciation trims it down to around 9% in dollar terms. Factor in taxes, and the real return gets even slimmer.

Compare that to US Treasury bonds which offer about 4-5% risk-free returns, and you’ll see why many FIIs are choosing to exit. Add to that the recent changes in India’s Futures and Options (F&O) markets, weaker corporate earnings, global tariffs and geopolitical tensions, and you’ve got the perfect recipe for an FII exodus.

And at this point, you’re probably thinking — If FIIs leaving hurts the market so much, why does the government keep raising taxes on them? Isn’t that a losing game?

Now, you’re not wrong. Taxes are one of the few levers the government can control unlike market movements or currency fluctuations. Higher taxes boost revenue. But if they push FIIs away, it’s a self-defeating move. No investors, no gains, no tax revenue. That’s why many experts argue slashing capital gains taxes could lure FIIs back.

But the bigger question here is: Should this FII activity bother retail investors like us?

Well, yes and no.

Sure, FII movements impact overall market returns. But FIIs and retail investors operate on different wavelengths.

FIIs constantly shift money across geographies, chasing the best risk-reward ratios in dollar terms. Retail investors, on the other hand, earn, spend and invest mostly within India. They don’t have to worry about currency fluctuations or rebalance portfolios based on geopolitical risks. And history shows that while FII movements shake up the market in the short term, they don’t dictate long-term returns.

So, does that mean we should just “buy the dip”?

Not necessarily.

Huh, why do you say that, Finshots?

Well, because timing the market is nearly impossible, even for seasoned investors. Markets can stay volatile longer than you expect, and blindly jumping in just because prices are down doesn’t always end well.

So, what’s the best approach, you ask?

That brings us full circle to my friend and his stock-heavy portfolio. His strategy reminded me of the classic investing tale of Anne Scheiber, a story that’s often ignored because it seems too simple and boring.

Anne Scheiber started investing in 1920, setting aside small amounts from her modest paycheck. She had no fancy financial degrees, no insider knowledge — just an unshakable belief in long-term investing. She reinvested dividends, stayed frugal and held onto her stocks through every market crash. By the time she passed away in 1995, her initial savings of just $20,000 had grown into a staggering $22 million. Her annual return? Just 14%. Nothing flashy, just steady, disciplined investing over decades.

And what does this have to do with today’s FII sell-off?

Everything.

Because her story highlights a few important lessons for retail investors navigating turbulent markets:

1. Keep cash on hand: When markets correct, you need dry powder to buy at lower prices.
2. Focus on averaging in: Instead of worrying about market tops and bottoms, keep investing regularly.
3. Stick to the plan: Compounding works best over long periods.

Yes, markets will fall. Even if you follow these lessons, your portfolio won’t always look great. Maybe not even as great as your neighbour’s during a bull run. But if you stick to a patient, systematic approach, you’ll sleep better at night, no matter how wild things get.

The truth is, this lesson has always been around. The problem though is that people tend to ignore it when markets are booming. They chase high returns, ditch their disciplined approach, leave no cash for dips or worse, even take on leverage. That’s when trouble starts.

So the real question isn’t whether you should panic because FIIs are exiting. It’s whether you’re prepared for market cycles.

Are you cautiously optimistic, like Anne? Are you building a portfolio that can weather the storm? That means keeping cash reserves, diversifying wisely, avoiding unnecessary debt, and most importantly, when the next market crash comes, taking a deep breath, saying ‘All Is Well’, and sticking to the plan.

Until then…

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