The ongoing buying and selling battle between foreign and domestic institutional investors is not just routine stock selection — it reflects a deeper shift in market dynamics.
For the retail investor, though, while there are certainly pockets of opportunity in this tussle, they tread with caution.
Factors driving FII behaviour
“The approach of FIIs towards Indian equities will continue to be guided by certain priorities, like Indian equities’ valuations in relation to earnings growth,” says P Krishnan, Managing Director & Chief Investment Officer – Equity Asset Management at Spark Asia Impact Managers.
Other factors include how Indian stocks compare vis-à-vis other avenues for FPIs, in particular other emerging markets and finally whether the risk perception towards global investing and emerging markets warrants buying into a relatively expensive market like India.
“The near-term FII posture is shaped by three forces: the trajectory of the US dollar and interest rates, the valuation premium that Indian markets command over EM peers, and the earnings delivery of Indian corporates,” says Manish Jain, Deputy CEO, Choice Mutual Fund (Choice AMC).
India’s Nifty 50 trades at 22.5x trailing TTM consolidated earnings versus an EM aggregate P/E of ~17x. India has not meaningfully dipped below 21x in the last three years. For an FII managing a global EM basket, paying that consistent premium requires exceptional earnings conviction.
There is also a currency math – an FII who invested in Indian equities at the start of 2024 and exited in early 2025 with a modest Sensex gain would have earned barely 0.61% in dollar terms after rupee depreciation — against US 10-year bond yields that were above 4.5% through much of 2024, and remain at 4.08% as of February 2026. “That arithmetic continues to make the risk-adjusted case for India difficult,” says Jain.
“FIIs have been on the winning side since the FII strategy of ‘sell India, buy cheaper markets’ has paid them rich dividends,” says Dr V. K. Vijayakumar, Chief Investment Strategist, Geojit Investments.
FIIs got much superior returns from other markets – developed and emerging- in which they invested in 2025. Sustained DII inflows gave FIIs easy exit options at high valuations, says Vijayakumar.
Can DIIs absorb FII selling?
Experts are divided on whether DIIs can pick up the pace if FIIs short (sell) the Indian markets.
“It will be increasingly difficult to do so,” says Krishnan. While DIIs can act as a shock absorber, it is unlikely that they can keep propping up the market where valuation is becoming too heavy once you look beyond headline indices.
While the domestic narrative has been that valuations have moderated towards the ten-year mean, the median valuation of stocks held by most leading funds is much higher. Experts have seen more and more instances of severe drawdown in prices where there is over-valuation, over-ownership, and any negative news trigger.
“Even if the FIIs return (to Indian equities) with buying orders, the DIIs will book profits,” says Kishor P. Ostwal, CMD, CNI Infoexchange. Even though SIPs (systematic investment plans) are rising day by day, the DIIs lack the aggression to take markets to logical valuations.
“In contrast, FIIs are dynamic as they are accountable to only their LPs (limited partners) and they will have to show their performance,” says Ostwal. As far as DIIs are concerned, they are affected by the SEBI (Securities and Exchange Board of India) notification, which prevents them from buying aggressively.
“As per the SEBI notification, their average price of buying has to be within 5% of the weightage average of the day, which makes DIIs go slow and start buying only between 12 and 3, that too in a programmed way so that they remain in that average,” says Ostwal.
Jain has a different take.
In CY2024, while FIIs were net sellers in five months of the year, DIIs net invested ₹5.26 lakh crore — absorbing every rupee of FII selling pressure and more, while the Nifty still delivered 9.24% for the full year. In CY2025, with FII net selling at a record ₹1.7 lakh crore, DIIs more than compensated with a record ₹7.44 lakh crore in net purchases ($90.1 billion) — and the Nifty still delivered approximately 10%. “This is not a coincidence. It is architecture,” says Jain.
Jain, however, cautioned that DIIs cannot fully substitute for FIIs in two specific areas: price discovery in heavily FII-dominated individual stocks where FII positions are concentrated, and sentiment anchoring for global institutional flows that track India in EM indices.
“But at the market level — index support, absorbing sell-off pressure, sustaining broader participation — the DII firewall is now structurally robust,” he says.
Irrespective of the dichotomy in investment styles between the FIIs and the DIIs, Jain has a very unique perspective on the issue.
“The FII-DII divergence, far from being a source of market anxiety, is evidence of Indian capital markets reaching genuine maturity,” says Jain.
The FII-to-DII ownership ratio was 1.99 in March 2015 — FIIs owned nearly double what DIIs held. By March 2025, that ratio had inverted to 0.98. By December 2025, DIIs hold 24.8% of the Nifty 50 versus FIIs at 24.3% — meaning domestic institutions now have greater ownership even in the 50 most liquid, FII-dominated stocks in India. This transition, a decade in the making, is now structurally irreversible.
The retail investor today is not a passive bystander in the FII-DII dynamic. Through mutual funds, every SIP participant is the DII. The 9.79 crore SIP account holders collectively deploy over ₹31,000 crore every month with mechanistic consistency — unaffected by dollar movements, US rate cycles, or EM allocation mandates. This is the most profound shift in Indian investing: the individual savers of India have collectively become the institutional bedrock of Indian capital markets, opines Jain.
“My advice to the retail investor watching the FII-DII tussle is this – do not let the FII behaviour set your investment clock,” says Jain. FIIs are managing global portfolios with global constraints. You (Indian investor) are investing in the country that you live in, with an informational and temporal advantage that the FIIs will never fully have. “Use their volatility. Respect their liquidity. But never follow their fear,” says Jain.
Factors that will steer how FIIs invest in Indian equities
US interest rates remain the most powerful single FII deterrent. While US 10-year yields have eased from their 2024 peak — sitting at 4.08% as of February 20, 2026, down from above 4.5% through much of 2024 — they remain elevated enough that the risk-adjusted case for EM allocation stays challenging. An FII earning 4%+ risk-free in US bonds requires a compelling risk premium to allocate to Indian equities.
Also, dollar strength and the converse rupee depreciation will affect FII investments.
The China factor materially shifted the FII calculus in 2025. Following the DeepSeek AI announcement in January 2025, Chinese onshore and offshore markets added over $1.3 trillion in market value in a matter of weeks, while India’s market concurrently shrank by over $720 billion.
Geopolitical and tariff risk has moved from hypothetical to confirmed.
India’s valuation premium is the persistent domestic deterrent. With Nifty trailing P/E at 22.5x versus EM aggregate at ~17x, FIIs require both earnings growth and earnings predictability to justify continued allocation at these levels. The Q2 FY25 earnings miss was therefore doubly damaging. For an FII paying a premium multiple, weakening earnings visibility is the most direct trigger for position reduction.
The fiscal discipline is also a positive for FII investments vis-à-vis India. The fiscal deficit narrowed from 5.6% of GDP in FY24 to 4.8% in FY25 — meeting its revised target — and the FY26 target is set at 4.4%. This consolidation trajectory is a positive signal for sovereign ratings and macro credibility. “Any reversal or slippage from this path would be an immediate negative FII trigger,” says Jain.
(The author is a freelance writer. He tracks various beats like stock markets, bonds and personal finance.)
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
