Jane Street incident impacts FII sentiment on Indian equity markets

Foreign institutional investors remain cautious about Indian equity markets due to high valuations and regulatory uncertainty, particularly after the Jane Street episode. Despite markets reaching near all-time highs, investors are hesitant to invest in mid and smallcap segments. Regulatory uncertainty remains a significant risk to the market, and investors are cautious about valuations.

The Indian equity markets have reached near all-time highs, but foreign institutional investors (FIIs) remain cautious about investing, particularly in the mid and smallcap segments. Regulatory uncertainty, exacerbated by the Jane Street episode, has added to the investors' concerns [1].

Jignesh Desai, chief executive officer for institutional equities at Centrum Broking, highlighted three key risks to the Indian equity markets over the next six months: high valuations, regulatory uncertainty, and geopolitical challenges [1]. The Jane Street matter has further unsettled institutional investors, leading to a cautious approach towards the mid and smallcap segments.

The cautious sentiment is reflected in the slowdown of equity fund launches by mutual funds in the first half of 2025. Following a blockbuster 2024, the number of new fund offers (NFOs) dropped significantly, with only 29 schemes launched in the first half of 2025, collecting ₹12,543 crore, compared to 37 schemes that collected ₹38,655 crore in the same period of 2024 [2]. The moderation in new fund launches is attributed to the relatively flat equity markets, increased volatility, and geopolitical challenges.

Adding to the cautious tone, FIIs have renewed heavy selling in Indian equities, withdrawing over Rs 10,000 crore in five sessions through July 17, reversing three months of net buying [3]. Despite the foreign exodus, domestic institutional investors (DIIs) cushioned the market by pumping in nearly Rs 11,000 crore over the same period. The latest wave of outflows has pushed the July tally past the $1 billion mark, marking a sharp reversal after three months of net buying.

The cautious sentiment among FIIs and DIIs is further reinforced by the downgrade of India’s equity rating to 'neutral' by global brokerage Citi. The firm cited stretched valuations and a moderating earnings growth outlook, while reaffirming its 'overweight' stance on markets like China, Korea, and the Philippines [3].

In conclusion, the Indian equity markets are facing significant headwinds due to high valuations and regulatory uncertainty, particularly after the Jane Street episode. Despite the markets reaching near all-time highs, investors are hesitant to invest in the mid and smallcap segments, and the cautious sentiment is reflected in the slowdown of equity fund launches and the renewed selling by FIIs.

References:
[1] https://www.business-standard.com/markets/interviews/jane-street-episode-unsettled-some-institutional-investors-jignesh-desai-125072000449_1.html
[2] https://m.economictimes.com/mf/analysis/equity-fund-launches-slow-down-in-2025-amid-stock-market-uncertainty/articleshow/122602570.cms
[3] https://timesofindia.indiatimes.com/business/india-business/fii-selloff-rs-10169-crore-pulled-out-in-5-days-from-indian-markets-valuation-fears-rise/articleshow/122769720.cms