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Foreign portfolio investors (FPIs) pulled out about $3.1 billion from Indian financial stocks in October, the second-highest amount ever from the sector and accounting for 30% of the record overall withdrawal for the month, data showed on Thursday.

The 260.42 billion-rupee selloff in financials - the heaviest weighted index on the benchmark NSE Nifty 50 - contributed to the record monthly outflows of $11.2 billion.

This triggered a 6% drop in the Nifty 50 and BSE Sensex, their worst monthly decline since March 2020.

A slowdown in loan growth, driven by the Reserve Bank of India's (RBI) clampdown on "exuberance" in retail lending and moderation in the net interest margins of several banks in the September quarter resulted in FPI selling in the sector, according to analysts.

"We expect a re-balancing between India and China from foreign investors to continue in the short term," said Vineet Agrawal, co-founder of fixed income investment platform Jiraaf.

Foreign investors sold Indian stocks in every session last month as funds were redirected to China after Beijing's stimulus measures and relatively cheaper stock valuations.

Eighteen of the 24 sectors saw outflows in October, with significant selling by FPIs in oil and gas, fast-moving consumer goods (FMCG), auto, and consumer services.

Weaker earnings further fuelled foreign selling. The auto and oil & gas sectors both shed around 13% in October, while consumer stocks declined approximately 10%.

Although FPI outflows triggered a market sell-off in October, analysts view this as temporary and expect domestic inflows to counter the slide caused by foreign selling.

"Even with moderating earnings, sustained inflows from retail and mutual fund investors would cushion the markets," Jiraaf's Agrawal said.

($1 = 84.3400 Indian rupees)