FIIs vs DIIs: Reversing roles in India's equity market after 25 years

With enough firepower to counter FIIs, DIIs have made India's equity market more resilient, but what's driving the shift?

In 1992, foreign institutional investors (FIIs), or foreign portfolio investors, were allowed to participate in the Indian equity market, marking a major step in opening the Indian capital market to foreign investment. FIIs began their operations with a modest investment of ₹13 crore in 1992-93. At that time, domestic institutional investors (DIIs), comprising the erstwhile Unit Trust of India (UTI), six bank-sponsored mutual funds, and four financial institution-sponsored mutual funds, were well-established. In 1993, private-sector mutual funds were also allowed, which, along with the mutual funds already in operation, were expected to act as a counterweight to FIIs. The combined equity investments (outstanding) of DIIs were approximately ₹45,000 crore at end-March 1993. However, the next few years proved turbulent for DIIs, reducing their relative significance markedly. 

UTI, which was by far the largest mutual fund at the time, faced serious problems in its assured-return schemes in 1998. This shook investor confidence in mutual funds, slowing down their resource mobilisation over the following years. Consequently, outstanding equity investments of DIIs rose only marginally, from ₹65,300 crore at end-March 1998 to ₹65,800 crore by end-March 2000. During the same period, FII investments more than doubled, reaching ₹70,300 crore, thereby surpassing DII investments for the first time. DII equity investments declined to ₹59,000 crore by end-March 2005, partly due to the bifurcation of the erstwhile UTI into two components in 2003. 

The outstanding equity investments by FIIs over the next 14 years (2000-01 to 2013-14) slowed somewhat, growing at a rate of 18 per cent compared with 58 per cent in the first six years (1994-95 to 1999-00). However, during the same period, investments by DIIs  registered a negative growth rate of 2 per cent. Consequently, outstanding equity investments by DIIs, at ₹42,000 crore at end-March 2014, paled in comparison with those of around ₹6.6 trillion by FIIs. 

The year 2014-15, however, marked a turning point in the operations of DIIs — their investments in equities surged by 98 per cent and maintained robust growth thereafter, expanding at an annual average rate of 42 per cent since then. Investments by DIIs grew at a much higher rate of 55.4 per cent from 2014-15 to 2019-20, compared with 37 per cent in the post-Covid period (2021-22 to 2024-25). Thus, contrary to the common narrative, retail investors started getting attracted to the equity market much before the Covid pandemic. This is corroborated by the share of capital market instruments in the gross financial savings of the household sector, which, at over 6 per cent, was broadly the same as in the pre-Covid period (2014–15 to 2019–20). In absolute terms, investments by DIIs reached an all-time high of ₹14 trillion at end-March 2025. 

In contrast to the rapid growth of DII investments over the past decade, FII investments grew at only 4.9 per cent.  Consequently, their outstanding investments, at ₹10 trillion at end-March 2025, were about 29 per cent lower than those of DIIs. Thus, DIIs have regained their predominant position in the equity market after a long hiatus of 25 years. 

It is heartening that DIIs now have enough firepower to counter FIIs, making India’s equity market more resilient. Over the last decade, it is DIIs that have held sway over the market. The co-movement (correlation) between FII investments and the equity market (BSE Sensex), which was 0.37 from January 2000 to March 2014, fell to a negligible (–) 0.03 from April 2014 to June 2025, implying that over the past decade, FIIs have had virtually no impact on the equity market. In contrast, the correlation between DII investments and the equity market, which was (-) 0.20 during January 2000 to March 2014, rose sharply to 0.59 during April 2014 to June 2025, suggesting that over the past decade, DIIs have predominantly influenced the equity market.

While DIIs deserve credit for promoting the equity culture in the country, especially in tier-II and tier-III cities, there is still a long way to go. However, a key question to ask is: Why investments by FIIs have slowed down sharply in the last 10 years? While the answer is not straightforward, it is worth noting that the average valuation (price-earnings multiple) of the Indian equity market, which was 18.5 (range: 11-28) from January 2000 to March 2014, rose to 23.7 (range: 18.5- 41.1) between April 2015 and March 2025. 

It seems that high valuations have deterred FIIs — who have the flexibility to invest across countries — from increasing their exposure to the Indian equity market over the past decade. Will FIIs return to India in the same way they did in the first 20 years of their operations? Only time will tell. 

The author is senior fellow, Centre for Social and Economic Progress, New Delhi. The views are personal