Domestic Investors Overtake Foreigners in India Equities, Widening Gap to 25-Year High

The participation of domestic institutional investors (DIIs) in Indian equities has surged, reaching an all-time high of 18.26% in NSE-listed companies as of the September quarter. This marks a significant increase and represents the widest gap seen between DII and foreign portfolio investor (FPI) holdings in 25 years. Conversely, foreign ownership has declined to 16.71%, its lowest point in 13 years. DII holdings first surpassed FPI holdings in the March quarter, and this trend has accelerated since. The growth in domestic investment is largely propelled by steady inflows from retail investors, particularly through mutual funds and their systematic investment plans (SIPs), which now account for 10.9% of listed companies' shares. In the July-September period, domestic investors bought shares worth ₹2.21 lakh crore, while foreign investors sold Indian stocks worth ₹1.02 lakh crore. Foreign fund managers have been reducing their exposure due to global uncertainties, higher Indian market valuations, and a preference for other emerging markets like China, Taiwan, and Korea. Despite this sustained selling by foreign investors since December 2020, the Indian market has shown remarkable resilience, attributed to strong domestic inflows that provide crucial support, unlike in the past when foreign outflows could trigger market crashes. However, foreign funds continue to show interest in Indian IPOs, investing significant amounts in primary market offerings during Q3. Analysts suggest that while FPIs are cautious about current valuations in the secondary market, they might increase support if the market corrects.

Impact: This trend signifies a growing self-reliance of the Indian stock market, less dependent on foreign capital flows. While positive for domestic confidence, a continued reduction in foreign investment could limit upside potential or increase volatility if domestic inflows falter. The resilience shown so far indicates a maturing market. Rating: 8/10

Difficult terms explained: Domestic Institutional Investors (DIIs): These are investment funds based in India that invest in Indian securities. Examples include mutual funds, insurance companies, and pension funds. Foreign Portfolio Investors (FPIs): These are investors from outside India who invest in Indian securities. They include foreign mutual funds, hedge funds, and individual foreign investors. Basis Points (bps): A basis point is one-hundredth of a percentage point, meaning 1 bp = 0.01%. An increase of 44 basis points is equivalent to 0.44%. Systematic Investment Plans (SIPs): A method of investing a fixed amount of money at regular intervals (e.g., monthly) into a mutual fund scheme, typically used by retail investors. Secondary Market: The market where existing securities are traded between investors, such as the stock exchange. Primary Market: The market where new securities are issued for the first time by companies to raise capital from investors, such as through an Initial Public Offering (IPO). Initial Public Offering (IPO): The first time a private company offers shares of stock to the public, allowing it to raise capital.