India’s equity market has faced persistent foreign institutional investor (FII) outflows since late 2023, driven by global interest rate hikes, geopolitical risks, and shifting capital flows. Despite these pressures, the market has shown surprising resilience. This strength can be attributed mainly to the consistent participation of domestic institutional investors (DIIs) and the growing confidence of retail investors. This blog explores how domestic capital shapes market behaviour amid ongoing FII sell-offs in FY24 and early FY25.
How are domestic investors stabilising the market during FII sell-offs?
In FY24, FIIs withdrew over ₹1.15 lakh crore from Indian equities. Yet, the markets remained broadly stable. Why?
- DIIs infused ₹4.34 lakh crore during the same period, neutralising much of the impact from FII outflows.
- Despite persistent selling by foreign investors, the Nifty50 still posted a 9.24% annual gain in 2024.
- This shift highlights how Indian institutions—mutual funds, insurance firms, and pension funds—are becoming reliable sources of market liquidity.
Domestic investors are now playing a key role in market cushioning during global risk-off phases by maintaining long-term positions and capitalising on corrections.
What is driving the foreign institutional sell-off in India?
FIIs have been net sellers in recent months, driven by a mix of global and domestic factors:
- Rising US interest rates have made dollar-denominated assets more attractive than emerging markets.
- Global risk aversion linked to geopolitical tensions and China’s slowdown has led to reallocation away from equities.
- Domestically, valuation concerns in specific Indian sectors and profit booking near record highs have triggered exits.
As global capital chases safety and returns, Indian markets have seen volatile foreign flows, but stable domestic buying has softened the shock.
Are SIPs helping cushion volatility in the equity market?
Yes, Systematic Investment Plans (SIPs) have become a vital source of steady domestic inflows:
- Monthly SIP collections have consistently crossed ₹15,000 crore in FY24.
- SIPs enforce disciplined investing, reducing the impact of panic selling and global cues.
- Through rupee cost averaging, SIPs ensure more units are bought during corrections, boosting long-term portfolio efficiency.
SIPs reflect a fundamental shift in Indian retail behaviour—from trading-based participation to goal-based investing, which supports broader market stability.
How do DII and FII strategies differ, and what does that mean for long-term stability?
Understanding the difference in strategies helps explain why DIIs are more stabilising compared to FIIs:
| Factor | DIIs | FIIs |
| Investment Horizon | Long-term | Short- to medium-term |
| Drivers | Domestic macro, fundamentals | Global cues, liquidity flows |
| Market Reaction | Buy on dips | Sell in volatility |
| Capital Behaviour | Steady, predictable | Opportunistic, reactive |
This contrasting approach is why DII activity is seen as a stabilising anchor, especially during periods of foreign capital flight.
What role do retail investors play in recent market dynamics?
Retail investors have emerged as a cornerstone of India’s equity market resilience, especially since the post-2020 recovery. In 2024–25, their growing influence is reflected in multiple dimensions:
- Demat account additions and mobile trading activity have reached record levels, showing how direct market access has become more democratic and widespread.
- Retail AUM in mutual funds, mainly through SIPs, continues to hit new highs, crossing ₹1.8 lakh crore in monthly contributions by early 2025. This showcases a shift from opportunistic investing to disciplined wealth creation.
- Using social media platforms and fintech apps for real-time learning, trade ideas, and market insights has fostered a more informed and engaged investor base.
- Most notably, retail investors are displaying staying power during corrections. Instead of panic-selling, many use dips as opportunities, reflecting a structural shift toward long-term investing over speculative trading.
This evolving behaviour signals rising financial maturity and positions retail investors as participants and stabilisers in the broader market framework.
How are mutual funds and insurance companies absorbing market volatility?
Key domestic financial institutions are stepping in when FIIs retreat:
- In Q3 FY25, domestic mutual funds invested ₹1.54 lakh crore in NSE-listed companies.
- Their market holdings rose to 9.93% of the total NSE equity market capitalisation.
- Insurance and pension funds offer long-term capital and are less affected by short-term market moves.
These institutions are building a durable domestic capital base that absorbs shocks and promotes consistent equity market expansion.
Understanding the Power of Domestic Flows
As FIIs continue to respond to global triggers, India’s equity market is increasingly anchored by domestic capital. DIIs and retail investors are offsetting foreign outflows and reshaping the market’s long-term direction. Their steady participation, combined with growing financial awareness, is creating a more resilient equity ecosystem. For traders and investors, recognising the strength of this domestic shield is key to developing confident, informed strategies.Platforms like Streetgains provide timely research and market insights to help investors navigate such shifts with data-backed confidence.
Disclaimer:
The content in this blog is intended for informational purposes only and does not constitute investment advice, stock recommendations, or trade calls by Streetgains. The securities and examples mentioned are purely for illustration and are not recommendatory.
Investments in the securities market are subject to market risks. Please read all related documents carefully before investing.
Domestic vs Foreign Investment Impact in Indian Markets FAQs:
Domestic institutional investors have played a key role in stabilising the market by consistently investing during periods of foreign outflows. Their long-term approach and sustained capital infusion have helped reduce volatility and supported index performance despite external pressures.
FII outflows have been driven by global interest rate hikes, rising yields in developed markets, and broader risk-off sentiment due to geopolitical tensions. Short-term valuation concerns and profit booking near all-time highs have also triggered exits.
Yes, SIPs bring regular, disciplined inflows into equity markets, regardless of short-term volatility. This consistent investment behaviour provides a stabilising effect, especially during times of heightened market uncertainty or foreign capital withdrawal.
DIIs typically invest with a long-term outlook based on domestic fundamentals, while FIIs often respond to global liquidity, currency shifts, and macroeconomic developments. This makes DII flows more stable and crucial for market consistency during volatile phases.
Retail investors, primarily through SIPs and direct stock buying, have become a reliable source of equity market support. Their increasing participation has helped counterbalance foreign selling and contributed to the market’s overall resilience.
Mutual funds, insurance companies, and pension funds provide long-term capital, helping absorb volatility during foreign sell-offs. Their steady allocation to equities ensures sustained liquidity and reduces the market’s dependence on short-term global flows.
The growing adoption of SIPs and equity mutual funds suggests increasing investor confidence and financial awareness. Many retail participants are now focused on long-term wealth creation rather than reacting impulsively to market swings.
Streetgains provides data-driven market insights that help investors understand institutional behaviour and broader trends. By analysing DII and FII activity, our research enables clients to align their investment strategies with informed, long-term perspectives.
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