A Structural Shift: DIIs Cushion FII Exodus, Drive Ownership Flip in Indian Markets

As foreign portfolio investors (FPIs) flock out in the face of US tariff uncertainty and a weakening rupee, domestic institutional investors (DIIs) have emerged as the stabilising force in the Indian stock market. Year-to-date, FPIs have withdrawn over ₹1.17 lakh crore, yet steady DII inflows, fueled by systematic investment plans (SIPs), mutual funds, and insurance-linked allocations, have not only arrested sharp downturns but also aided swifter recoveries.

The relentless support from DIIs has also reshaped the ownership structure in Dalal Street. DIIs have now piped FIIs to own a greater chunk within the Indian stock market. DIIs now own 17.62% of market capitalisation against FPIs’ 17.22% as of March 2025, a historic flip that comes as a testament of both the ‘financialisation of savings’ and the growing appetite of retail investors for long-term, SIP-backed investments.

At the forefront of the rise in ranks of DIIs is steady monthly SIP inflows, which according to Harshad Borawake, Head of Research & Fund Manager, Mirae Asset Investment Managers, averaged 25,000 crore per month.  “The trend also highlights a structural shift. Indian households are now channelling a larger share of savings into financial assets,” Borawake said.

“Unlike FPIs, which are highly sensitive to global liquidity and geopolitical events, domestic flows are anchored in long-term savings behaviour. This increasing investor discipline reflects rising financial literacy and conviction in India’s GDP growth trajectory.”

The Journey Upwards

The optimism doesn’t end there as SIP inflows are projected to hit ₹30,000 crore in the near-term, insulating the Indian market from global shocks. Coupled with RBI accommodative policies and an FY26 GDP growth estimate of 6.4%, this rising DII dominance not only tempers volatility but also positions India for a structural bull run. Projections suggest that by 2030, DIIs could command 25% of market capitalisation, turning heads around the idea of the country funding its own stock market, betting on its own growth.

Borawake further highlighted that it was for the first time that domestic institutions own more Indian equities than foreign investors. “Greater domestic ownership tends to reduce volatility since local investors are less reactive to global shocks and place greater weight on domestic macro data and corporate earnings. This broadens market participation and improves cycle stability,” he explained.

The numbers already reflect the change as household financial savings allocated to equities and mutual funds now stand at over 9%, sharply up from just 4% a decade ago. With bank deposit growth trailing credit growth, the relative attractiveness of equities is just on a rise.

This trend of domestic investors financing the local markets has been laying ground across Asian economies since a decade ago, but only gathered momentum post COVID. “Asia buys Asia is a mega trend we have tracked since 2012. Since then, it has expanded far faster than expected. Asian households are shifting from gold, jewellery and property towards mutual funds and insurance products,” HSBC wrote in a recent report.

It is hardly surprising that India, alongside China, has led this charge, driven by tax incentives and government-backed savings schemes. “India’s domestic AUM, for instance, grew at an 11% CAGR in 2012–14, rising to 13% from 2017 onwards,” HSBC added.

The NSE’s latest Market Pulse report echoes this transformation. “Barring a brief decline in FY21, domestic mutual fund ownership has risen sharply over the past eight fiscal years, underscoring growing retail interest in equity mutual funds, particularly through the SIP route,” the report said.

The FY21 dip, it noted, was largely due to muted SIP inflows and elevated redemption pressures amid the COVID-19 shock, which eroded disposable incomes. Even then, part of this capital shifted into direct equities, reflected in a rise in retail shareholding. Since June 2021, with a strong resurgence in SIP-led inflows, mutual fund ownership in NSE-listed companies has climbed steadily to fresh highs.

Analysts at HSBC share the view that SIPs allowing retail investors to feed money into index funds monthly while enjoying tax deductions and capital gains exemptions are the backbone of India’s financialisation of savings.

Can DII Flows Offset FII Outflows Ahead?

The imposition of sweeping tariffs on Indian exports by the US, a depreciating rupee and moderating earnings growth has cast a shadow over FIIs sentiment, sparking an exodus of flows. The rupee weakened 3-4% against the US dollar, eroding dollar-adjusted returns for foreign investors.

That said, the growing presence of DIIs have absorbed much of this selling pressure, still keeping the Nifty up around 6% year-to-date.

However, it is important to recognize that FIIs account for ~17% of market ownership, making their flows impactful in the short run. On that, Borawake holds the view that DIIs can smooth volatility over quarters, but month-on-month divergences between FII selling and DII buying will persist. “The domestic savings pool, however, continues to deepen, giving confidence that over the medium term, DII flows will increasingly neutralize global outflows,” he forecasted.

Further strengthening the powers of DIIs is India’s steady macro picture. India remains the fastest-growing major economy, with GDP projected at 6.4% in FY26. Couple that with the easing monetary policy, which is likely to continue amid moderating inflation and you’ll see more investors shifting towards SIPs in search of higher returns as compared to traditional fixed deposits.

“Lower policy rates translate into reduced real returns from fixed deposits and debt instruments, pushing household savings toward equity-oriented products,” Borawake explained.

To sum it up, the idea of ‘Atmanirbhar Bharat’ is taking shape in an equity market now owned in larger part by Indians themselves, and one where the arc of ownership points towards even greater domestic dominance in the years ahead.