Tariff shock turns FIIs to sellers in April. Analysts flag global risk but back India’s fundamentals

After a brief return of optimism in March, foreign institutional investors (FIIs) reversed course and turned net sellers in early April, rattled by a sudden escalation in global trade tensions. The trigger came on April 2, when U.S. President Donald Trump announced steep reciprocal tariffs, prompting a sharp correction in global equity markets and reigniting fears of inflation and stagflation in the United States. This shift in sentiment led to massive selling across key indices, with spillover effects reaching emerging markets like India.

The impact was swiftly reflected in FPI flows, which saw net outflows of over Rs 10,000 crore from Indian markets by April 5. While this marks a sharp contrast from the buying trend seen just weeks earlier, analysts remain divided on the outlook. While global uncertainty has put FPIs in a wait-and-watch mode, India’s robust macroeconomic fundamentals and supportive policy environment continue to offer long-term investment appeal, especially in comparison to other Asian peers.

Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, directly highlighted this shift, saying, "The trend of FPIs turning buyers in March changed in early April when FPIs turned sellers again." The trigger came on April 2, when President Trump announced reciprocal tariffs, leading to a major trend reversal in global stock markets.

The scale of the tariffs exceeded expectations. "The 10% base line tariff on all imports, the 25% tariff on all automobile imports and steep reciprocal tariffs on most countries" are, as Vijayakumar noted, expected to raise inflation in the US. He warned of broader economic risks, stating, "There are concerns that the US economy might even slip into stagflation."

This led to massive selling in the US markets where S&P 500 and Nasdaq lost above 10% in two days.

The fallout was not limited to the West. China’s swift response has escalated tensions further. "The Chinese retaliation to US tariffs has been quick," he observed, adding that "a full blown trade war will impact global trade and global economic growth." For now, he believes foreign investors are hesitant: "FPIs are likely to be in a wait and watch mode before turning buyers." As of April 5, "the total FPI selling in India stood at Rs 10,354 crores."

Despite this cautious global backdrop, Manoj Purohit, Partner & Leader, FS Tax, Tax & Regulatory Services at BDO India, remains optimistic about India’s ability to attract foreign capital over the longer term. He pointed out that, "With the beginning of the new financial year, optimism is high for both India and FPIs on the reviving market."

India, he noted, continues to hold strong appeal for global investors, thanks to its economic resilience and policy consistency. "India remains an attractive destination for attracting global capital," he said, adding that the recent US tariffs on Indian goods are relatively modest as compared to other Asian countries, providing India a strong proposition to offer viable export opportunities.

Purohit highlighted India’s position as one of the fastest-growing economies supported by a vast consumer market, skilled workforce, and business-friendly reforms.

The RBI’s decision to maintain bond and G-sec limits for FPIs is also seen as a positive signal. "The recent move by RBI... is a testimony of the government’s intent to keep gateway open for offshore participants," he added.

While near-term volatility persists due to global developments, both analysts suggest that India's economic fundamentals, infrastructure push, and diversifying trade strategy offer a compelling case for long-term investment. Purohit summarized this by saying, "The Indian economy currently seems well insulated to survive temporary headwinds on account of macro changes and domestic triggers of high valuation, tight earnings, and rising inflation costs."

As the markets now look to the RBI’s upcoming policy stance and the evolving tariff landscape, investor sentiment remains delicately balanced between caution and long-term confidence.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)