The Indian equity market witnessed a record net foreign institutional investor (FII) sell-off of more than ₹21,100 crore in the cash market on May 29, marking the highest single-day outflow in at least two years.

The sell-off gathered pace in the final hour of trading as investors reacted to the May 2026 rebalancing of the MSCI Global Standard Index. With the changes taking effect on May 29, passive global funds and exchange-traded funds (ETFs) were prompted to adjust their portfolios, resulting in estimated outflows of $800 million to $1 billion from Indian equities. The impact was most visible in large-cap and financial stocks, as well as counters affected by the index's inclusions and exclusions.

Exchange data showed FIIs sold equities worth ₹21,105.86 crore on May 29, with gross purchases of ₹89,733.64 crore and gross sales of ₹1.11 lakh crore. Domestic institutional investors (DIIs), meanwhile, continued to cushion the market by investing ₹16,764.14 crore during the session, registering their highest single-day buying in nearly two months.

Despite the sharp foreign exodus, domestic investors remained firmly supportive throughout May. DIIs pumped a record ₹82,668.93 crore into Indian equities during the month, comfortably offsetting FII outflows of ₹55,963.33 crore. The divergence is even more striking on a year-to-date basis, with FIIs pulling out ₹2.74 lakh crore from Indian equities, while DIIs have invested a net ₹3.57 lakh crore.

The heavy selling weighed on benchmark indices. The Sensex plunged 1,092 points, or 1.44%, to close at 74,775.74 on Friday, while the Nifty fell 359 points, or 1.5%, to settle at 23,547.75. The market extended losses for a third consecutive session and ended near the day's lows.

Pabitro Mukherjee, Deputy Vice President - Technical at Bajaj Broking, described May as a month of extraordinary domestic resilience.

"Domestic Institutional Investors staged a historic defence of the market, injecting a staggering ₹82,668 crore. This massive capital cushion completely absorbed the relentless selling by FIIs, who offloaded ₹55,963 crore during the month, signalling a significant shift in market liquidity dynamics," he said.

According to Mukherjee, FIIs remained net sellers throughout the final week of May, offloading ₹23,734 crore over four trading sessions, while DIIs accumulated ₹25,503 crore and maintained a buying streak on every trading day. He attributed the foreign selling to escalating geopolitical tensions in West Asia, elevated crude oil prices, rupee weakness and inflation concerns.

Ponmudi R, CEO of Enrich Money, said domestic investors once again acted as the market's stabilising force. DII inflows of around ₹25,800 crore during the week absorbed a substantial portion of foreign selling and prevented sharper declines in benchmark indices.

"The divergence between foreign and domestic flows once again underscores the resilience of domestic investor confidence," he said, adding that local investors continue to provide a crucial anchor for market stability during periods of heightened volatility.

Investors are now closely tracking developments around U.S.-Iran negotiations, crude oil prices, the RBI's monetary policy decision and the progress of the southwest monsoon, all of which could influence institutional flows in the coming weeks.

Vinod Nair, Head of Research at Geojit Investments, said the near-term direction for Indian equities will hinge on a combination of domestic and global triggers, including RBI policy decisions, GDP growth data and geopolitical developments. While easing crude prices and improving geopolitical sentiment have provided some relief, a sustained recovery in large-cap stocks will likely require a reversal in FII selling and greater policy clarity.