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India’s stock market story in FY26 is increasingly becoming a tale of two forces moving in opposite directions. On one side are Foreign Institutional Investors (FIIs), whose volatile and profit-driven flows have raised concerns among policymakers and market participants. On the other side stand Domestic Institutional Investors (DIIs), who have emerged as the stabilising backbone of the Indian equity market. The latest Economic Survey clearly highlights this structural shift, underscoring a crucial reality: while FIIs continue to exit aggressively, domestic institutions are playing a far more constructive and enduring role.
Volatile FII Behaviour: Chasing Returns, Exiting at Will
According to the Economic Survey, Foreign Portfolio Investors (FPIs) displayed sharp volatility during FY26. In Q1 FY26, they were net buyers of equities but net sellers of debt. However, this trend reversed in Q2 and Q3 FY26, when FPIs turned net sellers of equities while shifting towards Indian debt instruments.
As of 13 January 2026, FPIs have already sold Indian equities worth ₹16.5 thousand crore. From April to December 2025, FPIs were net sellers of Indian securities overall. This persistent selling pressure has weighed heavily on market sentiment, especially in export-oriented sectors like IT and healthcare.
The reasons cited are largely external:
- Relative underperformance of Indian equities compared to global peers
- Global risk-off sentiment amid elevated U.S. bond yields
- Trade and policy uncertainties
- Depreciation of the Indian rupee
While these factors explain FII behaviour, they also reinforce a long-standing criticism — FIIs are primarily short-term profit seekers. They enter markets during favourable global liquidity cycles and exit just as quickly, often triggering sharp corrections that hurt domestic investors.
Are Retail Investors Paying the Price?
There is a growing concern that repeated FII sell-offs are “crushing” the market, trapping retail investors who enter during bullish phases. When FIIs dump large quantities of shares, stock prices fall sharply, eroding household wealth. Unlike FIIs, retail investors lack the ability to exit swiftly or hedge global risks, making them more vulnerable to such volatility.
This pattern strengthens the argument that FII flows, while large in size, do not necessarily reflect long-term confidence in India’s economic fundamentals. Instead, they often reflect global portfolio reallocations, leaving domestic investors to absorb the shock.
Domestic Institutional Investors: The Silent Stabilizers
In stark contrast, Domestic Institutional Investors have emerged as the real shock absorbers of the Indian stock market. Mutual funds, insurance companies, and other domestic institutions have consistently remained net buyers, counterbalancing FII outflows and preventing deeper market corrections.
As per the Economic Survey:
- As of 30 September 2025, DII ownership in NSE-listed equities stood at 18.7%
- In Q2 FY26, DII share (by value of holdings) reached 18.3%, surpassing FII share at 16.7% — a 13-year low for FIIs
- This marked the first time DIIs overtook FIIs in Q4 FY25, a trend that has only strengthened since
This shift is not symbolic; it is structural. It signals growing domestic financial depth and reduced dependence on foreign capital for market stability.
Mutual Funds Lead the Domestic Charge
Mutual funds have played a decisive role in this transformation. In Q2 FY26, mutual fund ownership (by value of holdings) touched an all-time high of 10.9%. Systematic Investment Plans (SIPs), steady household inflows, and a growing culture of long-term investing have empowered mutual funds to act as reliable buyers even during volatile phases.
The combined share of DIIs, retail investors, and high-net-worth individuals reached a record 27.8% in Q2 FY26 — a powerful indicator of domestic confidence in India’s growth story.
Debt Market: A Different Story for FPIs
Interestingly, while FPIs exited equities, their outlook on Indian debt improved toward the end of 2025. The yield spread between 10-year Indian and U.S. government bonds widened from 165 basis points in May 2025 to 250 basis points by year-end, making Indian debt more attractive. Supported by SEBI’s relaxation of FPI norms and ongoing India-US trade talks, debt inflows may remain positive.
However, equity markets tell a clearer story: long-term commitment is increasingly domestic.
India’s Market Is now Mature Enough in the Hand of Domestic Investors
The Economic Survey subtly but clearly raises concerns about the nature of FII participation in Indian markets. While foreign capital remains important, it is domestic institutional capital that is proving to be more stable, patient, and aligned with India’s long-term economic fundamentals.
FIIs may continue to book profits and exit during global uncertainty, but India’s markets are no longer hostage to these flows. The rise of DIIs, mutual funds, and retail investors marks a maturing financial ecosystem — one that is better equipped to withstand volatility and protect domestic wealth.
In the evolving narrative of India’s capital markets, the message is clear: foreign investors may come and go, but domestic institutions are here to stay — and they are now the true custodians of market stability.
