Role of Foreign and Domestic Institutional Investors in Indian Markets

The dynamics of Indian equity markets are significantly influenced by both Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs), especially in the context of market stability and growth.

Current Investment Trends

• Year-to-date (Y-T-D), FIIs have divested ₹1.42 trillion from Indian equities.
• Conversely, DIIs have purchased approximately ₹5.24 trillion worth of Indian shares.

Impact of DIIs

DIIs have emerged as substantial contributors to India's market resilience:

• Mohammad Imran, a research analyst, notes that DIIs' steady inflows are crucial for making Indian markets more self-reliant and less susceptible to global economic fluctuations.
• In FY25, despite significant FII outflows of $15.6 billion, the Nifty index still realized a 5% gain.

Importance of FIIs

Although domestic flows have reduced market volatility, FIIs remain integral for:

• Maintaining market stability and sentiment, as global events can significantly affect Indian markets.
• Driving sentiment, valuations, and ensuring integration with global capital flows.
• FIIs' activities correlate with market returns, with a 74% correlation on a TTM basis noted recently.

Balance Between FIIs and DIIs

Experts suggest that a balanced contribution from both FIIs and DIIs is crucial:

• Devarsh Vakil of HDFC Securities points out that while DIIs can mitigate some impacts of global shocks, prolonged FII sell-offs could still affect the market.
• Puneet Singhania emphasizes that FIIs, despite their reduced dominance, remain essential for large-scale financial activities like IPOs and QIPs.

Conclusion

Overall, while DIIs have bolstered India’s market stability, FIIs continue to play a pivotal role in market sentiment and liquidity, underscoring the need for a harmonious balance between domestic and foreign investments in Indian markets.