The Rise of Domestic Institutional Investors in India

India’s capital markets are undergoing a significant transformation, marked by a fundamental shift in ownership patterns. For the first time in 22 years, Domestic Institutional Investors (DIIs) have surpassed Foreign Institutional Investors (FIIs) in ownership of companies listed on the National Stock Exchange (NSE). This pivotal moment signals more than just a statistical milestone, it represents the growing maturity, confidence, and resilience of India’s financial ecosystem.

DII Ascendance: The Numbers Speak

In the March 2025 quarter, DII holdings in NSE-listed companies rose by 73 basis points to 17.6%, surpassing FII holdings, which edged down to 17.2%. A decade ago, FIIs held 20.7% compared to the combined 18.5% of DIIs, retail investors, and HNIs. The tide has clearly turned.

The Ownership Crossover: DIIs Overtake FIIs in 2025

Source: Economic Times, April 2025

DIIs have buffered against FII outflows, providing much-needed market stability. In the March 2025 quarter, FIIs sold shares worth ₹1.4 lakh crore, while DIIs invested nearly ₹1.9 lakh crore.

This shift isn’t limited to headline indices; even in NSE 500 stocks, DIIs have overtaken FIIs for the first time. Over the past five years, DIIs have been aggressively investing, with flows driven by strong retail participation through mutual funds, insurance, and pension schemes. This has helped offset the significant FII outflows.

When FIIs stepped back, DIIs stepped up – and then some

Source: Motilal Oswal Research 360

Market Resilience: DIIs as a Stabilizing Force

In October 2008, FIIs sold ₹16,000 crore in equities, triggering a 25% market fall. Fast forward to January 2025: despite FIIs selling ₹87,000 crore, the Nifty declined by just 2-3%. Why? Because DIIs stepped in, investing nearly ₹86,000 crore in the same period. This pattern of DIIs acting as counterweights has grown stronger over time.

A study correlating institutional activity and index performance found a positive correlation between FII activity and Sensex and a negative correlation between DII activity and Sensex. This inverse correlation implies that DIIs often act as buyers when FIIs exit, smoothing volatility and reinforcing investor confidence.

Why DIIs Are Rising: A Shift in Household Savings

Domestic institutions, including mutual funds, insurance companies and pension funds, have been pumping money into the stock market for the past five years, armed with a flood of inflows from individual investors. This is a consequence of a significant shift in household savings patterns. Individuals are now redirecting savings from traditional avenues such as fixed deposits and real estate to equities, drawn by superior returns and better access to capital markets.

This change is crucial as it deepens the domestic capital base and instills long-term financial behavior, further supporting DIIs’ growing role in Indian markets.

The Global View: How Developed Markets Stack Up

In developed economies, strong domestic investor bases are the norm. In the United States, foreign investors own only about 20% of U.S. equities (as per Apollo Global Management as of April 2025). The majority of equity ownership is domestic, primarily through pension funds, mutual funds, and insurance companies. This entrenched DII dominance has helped sustain long-term market resilience, even amid global turbulence. A robust domestic investor ecosystem acts as an anchor, reducing susceptibility to foreign capital volatility.

The Nature of FII vs DII: Global vs Local Commitment

There is a fundamental behavioral distinction between FIIs and DIIs:

• FIIs often operate with a global outlook. Their investment decisions are highly sensitive to international economic conditions, including interest rates, geopolitical tensions, and macroeconomic policies. A negative global outlook frequently prompts them to exit emerging markets like India, creating potential market volatility.
• DIIs, by contrast, are India-rooted. They possess a more grounded understanding of domestic markets. With a long-term investment horizon and deep commitment to local fundamentals, they tend to stay invested even during global downturns, providing a stabilizing effect.

This dichotomy underscores the importance of a strong domestic investor base to counterbalance externally driven market shocks.

Flowing into the Private Markets

The DII narrative is extending into India’s private markets. According to the Oister x Crisil report, data based on 250 Category II AIFs highlights that resident LPs outnumber non-resident LPs by a significant margin. The share of resident LPs increased from ~73% in FY22 to ~76% in H1 FY25.

Breakdown of LP Participation – Resident vs Non-resident (%):

Source: Oister Global & CRISIL, No ifs about AIFs 2.0, January 2025

This indicates that domestic capital pools are increasingly powering India’s startup and growth-stage ecosystems. The transition from savings to equity culture is no longer limited to public markets.

Why Rising DII Participation is a Good Thing

• Market Stability: DIIs cushion against FII-driven volatility.
• Confidence in Economy: Rising DII flows signal faith in India’s structural growth story.
• Capital Formation: Strong domestic participation boosts internal capital formation and reduces external dependency.
• Private Market Evolution: The shift is enabling a more self-reliant growth model across both listed and unlisted markets.

Reduced Vulnerability to Global Shocks: With DIIs playing a more central role, India’s markets are less susceptible to the whims of global economic disruptions.

India’s financial landscape is maturing. The baton of market influence is being handed from global to local hands. As DIIs continue to gain prominence, mirroring patterns seen in the U.S. and other developed nations, India’s markets are poised to become more stable, confident, and self-sustaining. This is not just a cyclical trend, it’s the foundation for a resilient capital market future.

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