Foreign Investors Flee Indian Markets as Tariffs and Weak Earnings Loom

As of mid-August 2025, foreign portfolio investors (FPIs) have significantly increased their short positions in Indian index futures, reaching levels not seen since March 2023. This surge in bearish bets is driven by a combination of factors, including concerns over high market valuations, a weak earnings outlook, and the impact of US President Donald Trump's announcement of 50% tariffs.

According to Bloomberg data, FPIs' short positions have remained more than 10 times higher than their long bets since early August, a level last observed in March 2023. As a percentage of total positions, short positions have remained above 90% since the end of July.

Market experts believe that the indices are currently oversold, which may trigger a short-covering bounce in the near future. Historically, when an expiry period starts with a very high short percentage of over 85%, it often leads to a rise in the index as investors close their bearish positions. However, they caution that this bounce may be more of a trading opportunity rather than a sustained recovery, as FIIs have been strong sellers in the market.

The bearish sentiment has been further exacerbated by the strain in relations between the US and India, following Trump's harsh tariff announcement. Additionally, the tepid earnings growth and elevated valuations have emboldened the bears to increase their short positions, weighing on the overall market sentiment.