A 13-Year Low for FIIs: Who Owns The Market Now?

Alert! A powerful shift is quietly shaking the stock market movement fundamentals in India. It is for the first time that "Desi Money" is decisively in the driver's seat. In the quarter ending Sept 2025, DIIs (Domestic Institutional Investors) witnessed their holdings in NSE-listed companies surge to an all-time high of 18.26%. This is a 44-basis point jump. However, there is also a stark contrast in the FII (Foreign Institutional Investors) numbers. The FII ownership has shrunk to 16.71%, which is a 13-year low.

As per a study, this divergence had begun when DII holdings first surpassed FIIs in the Mar 2025 quarter. It has now widened to a 25-year peak.

Here is an understanding of its mechanics. Between July and September, FIIs sold shares worth ₹1.02 lakh crore, while DIIs, fuelled by a relentless retail money flow, bought shares worth ₹2.21 lakh crore. This can be a stride towards a new era of self-reliance for the Indian market. However, the critical question is: who is right, the departing global funds or the confident domestic investor?

What’s Driving This Great Divide?

If you examine the trend closely, you can discern two compelling stories.

1. Foreign investors: it is a story of caution
   
2. Domestic investors: it is one of confidence
   

The FII pullback is not an outright "Sell India" call. Rather, it is a "risk-off" pivot based on relative valuations. After a strong run, global fund managers are increasingly viewing Indian equities as expensive. AMCs are mandated to deploy funds irrespective of valuations. However, the foreign investors can have an option. They can deploy funds to lucrative markets globally. Thus, FIIs can be seen as the "smart money." This is because they exercise their choice to wait on the sidelines, either for correction or re-consolidation.

The domestic story is one of structural change. The DII surge is not being funded by large corporate treasuries. It is funded by a record-breaking wave of retail participation through SIPs (Systematic Investment Plans). This unstoppable flow has pushed the total mutual fund ownership of Indian companies to its own all-time high of 10.9%.

A Market Cushion Or A "Home Bias" Puzzle?

This is a new dynamic. The domestic money is acting as a counter-balance to foreign outflows, as a sign of a maturing market. This is a classic example of the "Domestic Cushion Hypothesis." Here, a strong, deep-pocketed local investor base can absorb external shocks and reduce market volatility.

This trend can also connect to a well-known economic theory called "Home Bias." As defined by economists, home bias is a long-standing puzzle in international finance where investors, despite the clear diversification benefits of investing globally, show an overwhelming preference for domestic assets.

What we are witnessing can be a fascinating divergence in this theory. Global investors (FIIs) are indeed overcoming their home bias to seek better value in other emerging markets. Simultaneously, Indian investors (DIIs) are strengthening their own home bias, placing a powerful bet that the long-term growth story of India is superior to the global alternatives, even at premium valuations.

The Narrative

The narrative, however, is not as simple as "FIIs are selling."

If you closely look at the data, their sentiment can seem far more nuanced. The FIIs are net sellers in the secondary market (trading existing stocks). However, they are aggressive buyers in the primary market (IPOs).

In Oct 2025, FIIs poured $1.2 bn (₹10,708 cr) into domestic IPOs. This was the second-highest monthly amount this year. Also, this has marked the fourth consecutive month where FIIs have invested more in the primary market than the secondary one.

This behaviour can suggest that the FIIs are not bearish on the "India story" itself. However, they are being highly selective. They seem sceptical of the high valuations of the established, publicly traded market. Also, they are more than willing to buy into new, high-growth companies at their IPO valuations.

So, has this set the stage for a new market dynamic? On one side, you have the mighty, mandated, and optimistic domestic retail flows. On the other hand, you have the choosy, valuation-conscious, and patient global capital. The market is holding its ground for now, but the big question remains: what happens if the domestic SIP flows begin to slow just as FIIs are proven right about a correction?

Source

The Economic times
Investopedia