THERE’S A TRANSFORMATION taking place on D-Street. For years, foreign institutional investors (FIIs) dictated the direction. But the balance of power visibly shifted in FY26.

As global uncertainty intensified and FIIs pulled billions out of Indian equities, domestic institutional investors (DIIs) stepped in with record buying, cushioning markets from a deeper correction.

A Motilal Oswal Financial Services report says DII ownership in Nifty 500 firms rose to an all-time high of 20.9% in March 2026, while FII holdings fell to a record low of 17.1%. The trend is mirrored in Nifty 50 firms. (See chart.)

The structural shift in institutional ownership, which gained momentum after the pandemic in 2021, continues to strengthen, says the report. And it reflects a broader structural change in how households save, invest, and participate in capital markets.

The trigger for persistent FII selling has been a combination of global macroeconomic stress, elevated Indian valuations, and a massive shift towards AI-driven opportunities. In FY26, FIIs sold equities worth nearly $19.7 billion, marking the highest annual outflow on record, according to NSE data. March saw outflows of $14.2 billion, the largest single-month capital exodus in the history of India’s stock markets.

The selling pressure has continued into FY27, with cumulative FII outflows standing at $10.15 billion as of May 15, 2026. Total FII outflows in CY2026 have crossed $25 billion in less than five months, surpassing the entire 2025 outflow of $19.16 billion. This highlights growing global risk aversion, persistent geopolitical uncertainty, and shifting capital flows towards developed and AI-driven markets.

V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, believes the trend is more cyclical than structural. He says, “Capital always pursues returns and currently returns in markets like the U.S., Japan, South Korea and Taiwan are superior.”

He points out that global investors are increasingly chasing the AI-led rally in developed markets. Sunny Agrawal, head of fundamental research at SBI Securities, agrees. “International capital is currently chasing themes such as AI infrastructure, semiconductors, GPUs, memory and data centres, which are generating strong earnings growth globally but remain underrepresented in Indian equity markets.”

The shift in global flows is visible in sectoral allocations. Motilal Oswal data shows FII allocation to tech within the Nifty 500 dropped to an all-time low of 7.3% in March. FIIs also cut exposure to private banks, NBFCs, real estate, technology, retail, consumer, healthcare, infrastructure, and utilities. Instead, FIIs selectively increased allocations towards metals, PSU banks, and logistics.

According to Sebi’s categorisation, large-cap, mid-cap, and small-cap stocks accounted for 67%, 22%, and 11% of the total Nifty 500 market cap, respectively. The report says that during FY26, FIIs reduced their exposure on a year-on-year basis in large-caps by 220 basis points (bps), mid-caps by 60 bps and small-caps by 100 bps.

Rising U.S. bond yields

Indian equities are also facing mounting pressure from a sharp rise in U.S. bond yields, which is fuelling risk aversion across global markets and weighing on capital flows into emerging economies such as India. The yield on the 30-year U.S. Treasury bond has risen 35 bps so far in 2026 to around 5.19%. And benchmark 10-year U.S. Treasury yields have climbed 48 bps to 4.69%.

Ajit Mishra, SVP, research at Religare Broking, says the “higher-for-longer” interest rate environment in the U.S. is prompting global investors to rotate capital away from emerging market equities. “For India, this pressure is further amplified by elevated crude oil prices, rupee weakness and concerns around external balances.”

Meanwhile, DIIs pumped in a record $94.2 billion during FY26 versus $71.8 billion in FY25, according to NSE data. In Q1CY26, DIIs invested $27.2 billion, backed by strong domestic liquidity flows through mutual funds, insurance companies, and pension funds. SIP inflows in FY26 peaked to an all-time record of $3.82 billion in March. Total assets under management via SIPs hit $200 billion, making up over 20.6% of India’s overall mutual fund industry.

Vijayakumar says DII ownership now substantially exceeds FII ownership. “SIPs have not faltered despite a time correction spanning 18 months. In fact, SIPs strengthened and remain resilient. This reflects the maturity of the Indian investor,” he says.

Agrawal says this reflects a deeper behavioural shift. “What is encouraging is that retail participation in India is becoming increasingly mature and long-term in nature,” he says.

The rise of DIIs is linked to India’s growing financialisation story. Over the past decade, household savings have steadily migrated from physical assets such as gold and real estate towards financial products, including equities and MFs. Digital investing platforms, greater financial awareness, and rising income levels have spurred this.

According to Motilal Oswal, DII holdings in large-caps rose to 22% in March 2026, while mid-cap and small-cap ownership climbed to 19% and 17.7%, respectively.

The trend is equally visible across sectors, with DIIs increasing stakes in 21 of 24 sectors within the Nifty 500 universe in FY26. The sharpest increases have been seen in private banks, technology, telecom, real estate, infrastructure, and healthcare. Private banks remain the largest sectoral exposure for DIIs, accounting for nearly 37.3% of holdings.

What lies ahead

According to Mishra, the March quarter earnings season and FY27 corporate guidance could play a pivotal role in reviving FII interest in Indian equities. “Strong guidance in sectors such as banking, capital goods, manufacturing, telecom and consumption could reinforce confidence that India remains one of the few structural growth stories globally,” he says.

Latest quarterly earnings data from Markets Mojo, a stock market research platform, points to a mixed but gradually improving corporate landscape. With 1,506 companies having announced their March quarter results till May 19, mid-cap firms emerged as the strongest performers, with 66% reporting positive earnings outcomes, compared with 55% among small-cap companies and 50% among large caps.

Despite the current pessimism, most market experts do not believe FIIs are abandoning India. The near-term challenge is primarily valuation and global uncertainty.

The emergence of DIIs as the market’s principal stabilising force represents one of the most important structural changes in India’s financial ecosystem. The rise of SIPs, growing retail participation and institutional domestic capital have collectively created a more resilient market architecture — one less vulnerable to sudden global capital swings.