Key Takeaways
- FPIs have withdrawn a record ₹1.66 lakh crore in 2025 and another ₹22.5 billion this month, pressuring the Nifty.
- Domestic institutions (DIIs) remain net buyers, adding ₹34 billion in the same period – a rare stabilising force.
- The lingering US‑India trade deal and layered tariffs keep sentiment fragile; a positive trigger is needed for a rally.
- Upcoming earnings of Reliance, HDFC Bank and ICICI Bank, plus PMI data, will dictate short‑term direction.
- Strategic playbook: favour quality large‑caps in IT, metals and select PSUs; stay cautious on rate‑sensitive realty and capital goods.
The Hook
You’re watching the Nifty wobble and missing the hidden risk beneath the FPI sell‑off.
Why the US‑India Trade Standoff Is Squeezing Indian Equities
The United States has layered two 25% tariffs on Indian imports – the first for generic trade imbalances and the second as a punitive response to India’s purchase of Russian oil. Washington argues that the oil flow funds Moscow’s war effort, a narrative that has hardened political resolve in Washington.
Negotiations have been ongoing for months, yet no definitive agreement is in sight. The uncertainty has forced foreign portfolio investors (FPIs) to treat India as a “risk‑off” market, prompting a net outflow of ₹22.53 billion in the first half of January 2026 alone. In total, FPIs have sold ₹1.66 lakh crore in 2025, the largest single‑year withdrawal on record.
Historically, similar trade‑related shocks have led to prolonged equity depressions. In 2018, when the US imposed steel and aluminium duties, Indian exporters saw a 12% dip in earnings, and the Nifty slumped 6% over three months. The current scenario mirrors that pattern, but the added layer of geopolitical risk (Russia‑Ukraine) amplifies the downside.
Sector‑wise, export‑heavy industries such as textiles, pharma and chemicals are most exposed because higher tariffs erode margins and reduce overseas order books. Conversely, domestically focused consumer staples and utilities see limited direct impact, making them potential defensive havens.
How Domestic Institutions Are Counterbalancing FPI Outflows
Domestic Institutional Investors (DIIs) have bought ₹34.08 billion of equity this month, effectively offsetting more than one‑half of the FPI sell‑off. This buying surge is driven by several factors:
- Regulatory encouragement: SEBI’s “institutional participation” guidelines reward long‑term holding.
- Valuation arbitrage: While the Nifty is down 1.73% YTD, many large‑caps trade below their 2022 12‑month average price‑to‑earnings (P/E) multiple, offering a margin of safety.
- Sector rotation: DIIs are reallocating from rate‑sensitive realty and capital goods into IT services, metals and select PSU stocks that enjoy steady cash flows.
Comparative analysis shows that Tata Group stocks have outperformed the broader index by 3.5% since the start of the year, thanks to strong order intake and a resilient domestic demand curve. Adani’s power and logistics assets have also held up, benefitting from government‑backed infrastructure spending that is insulated from US trade policy.
Technical definition: “Net Seller” refers to the net difference between purchases and sales by a class of investors. A persistent net‑seller position, as seen with FPIs, typically signals bearish sentiment, whereas a net‑buyer stance, like that of DIIs, can provide a floor for prices.
What the Upcoming Earnings Calendar Means for Short‑Term Direction
January’s earnings season is a decisive catalyst. Heavyweights – Reliance Industries, HDFC Bank and ICICI Bank – will release Q3 results within the next two weeks. Analysts expect Reliance’s oil‑to‑retail diversification to be the headline, while HDFC and ICICI’s loan‑growth numbers will test the health of the banking sector amid rising global rates.
Beyond the marquee names, mid‑cap firms in IT (e.g., Infosys, TCS) and metals (e.g., Hindalco) are slated to report. Strong earnings could spark a “quality‑driven” rally, attracting risk‑averse foreign funds back into the market. Conversely, a miss on earnings or guidance could deepen the sell‑off, especially if combined with any adverse US macro data (GDP, inflation, jobless claims).
Key domestic macro releases – PMI for manufacturing, services and composite – will also be scrutinised. A PMI reading above 50 signals expansion, which historically correlates with a 0.5‑1% lift in the Nifty within a week. Bank loan‑growth and deposit‑growth figures will provide insight into credit health, while foreign exchange reserve changes will hint at RBI’s capacity to intervene.
On the global front, US GDP growth slipping below 2% or inflation accelerating could prompt the Federal Reserve to delay rate cuts, tightening risk sentiment worldwide. That scenario would likely amplify FPI outflows, reinforcing the need for a defensive positioning.
Investor Playbook: Bull vs Bear Scenarios
Bull Case: A clean set of earnings, PMI readings above 50, and a positive signal from US macro data (e.g., lower inflation) could trigger a short‑term rally. In that environment, allocate 60‑70% of equity exposure to high‑quality large‑caps with strong earnings visibility – IT leaders (Infosys, TCS), metals (JSW Steel), and select PSU names (Coal India, NTPC) that enjoy government backing. Keep a modest 10‑15% tactical allocation to the “trade‑rebound” theme – stocks directly benefiting from a potential US‑India agreement, such as pharma exporters (Sun Pharma, Dr Reddy’s).
Bear Case: Continued FPI outflows, a disappointing earnings season, or escalation of US tariffs could push the Nifty below the 17,500‑18,000 support band. In that scenario, trim exposure to rate‑sensitive sectors (realty, cement, capital goods) and shift towards defensive staples (Hindustan Unilever, ITC) and high‑yielding PSU bonds. Consider hedging equity exposure with short‑term futures or options to protect against a further 5‑7% correction.
Regardless of the path, risk management is paramount. Maintain position sizes that allow you to withstand a 2‑3% volatility swing without breaching margin limits, and keep a cash reserve of at least 5% of portfolio value to exploit any sudden pull‑back.
Bottom Line: Stay Alert, Stay Selective
The confluence of US‑India trade uncertainty, layered tariffs and massive FPI withdrawals creates a volatile backdrop. Yet domestic institutions are stepping in, and the next wave of earnings could provide the catalyst needed for a market reset. By focusing on quality large‑caps, monitoring macro triggers, and employing disciplined risk controls, investors can navigate the turbulence and position themselves for upside when sentiment finally turns.