DIIs eclipse FIIs: Why does FII selling no longer break Indian markets?

There was a time when Foreign Institutional Investors (FIIs) dominated the Indian stock markets. Their inflows and outflows were used to gauge market strength. Heavy FII selling often disturbed markets, but increasing domestic inflows from mutual funds, insurance companies, and retail investors now provide strong liquidity support.

Domestic Institutional Investors (DIIs) have now emerged as a significant counterbalancing force to FIIs in the Indian equities market.

Systematic investment plans (SIPs) have generated a steady stream of long-term domestic capital, reducing volatility. This structural change reflects the increasing involvement of households and growing confidence in Indian markets.

The monthly SIP contributions in India increased from ₹12,693 crore in August 2022 to ₹28,265 crore in August 2025, representing a total rise of 122.6% over the three-year period. Annually, this reflects a compound annual growth rate of roughly 30%, emphasising the strong and consistent growth in investor participation through mutual fund SIPs.

Consequently, FII outflows no longer cause sharp declines, as DIIs increasingly influence market direction and help build greater resilience against external shocks.

“The dynamic between FIIs and DIIs in Indian equities has dramatically inverted, ending the era where foreign selling could destabilise the market,” says Pankaj Singh, Investment manager on smallcase and founder and principal researcher, SmartWealth.ai.

Singh said the dominance of FIIs in the equity market, which held three times the influence of DIIs in 2020 (FIIs: +₹1.7 lakh crore vs MFs: -₹0.6 lakh crore), has now ended. Today, DIIs (led by Indian Mutual Funds) are the decisive force.

In 2025 YTD, FIIs experienced a net withdrawal of ₹1.3 lakh crore, while DII inflows soared to an impressive ₹3.5 lakh crore, effectively giving DIIs three times the influence of FIIs. This DII strength serves as a vital buffer, successfully protecting markets from global shocks. Overall equity flow increased fourfold from ₹1.07 lakh crore in 2020 to ₹4.34 lakh crore in 2024, aiding in the stabilisation of equity valuation,” adds Singh.

According to analysts, a significant portion of FII outflows since 2023 (₹24.5 lakh crore) has occurred in the derivatives segment, which is a positive sign of a maturing market. This exit results directly from regulatory tightening aimed at curbing excessive leverage and speculative trading. “By reducing risky activity and potential losses, these measures pave the way for a healthier market structure and ultimately support greater capital formation for retail investors.”

Key takeaways

It is interesting to observe that the Indian market has matured. DIIs now hold three times the influence of FIIs, strengthening the market’s resilience to global volatility. Additionally, the market’s stability is supported by the quadrupling of total equity flows since 2020, reaffirming India’s position as a stable investment destination. Furthermore, substantial FII derivatives outflows indicate regulatory success, not weakness, resulting from measures to curb speculative trading.