FIIs Step Back, DIIs Power Up: Local Investors Fuel Stock Market Surge with Strong Inflows

Mutual funds, insurance companies, and local pension funds have stepped up to boost the Indian stock market, which has seen a sharp rise since the beginning of the year. This is happening even as foreign investors have pulled back. Whenever the market has dipped, these domestic institutional investors (DIIs) have quickly bought stocks, showing that local investors are becoming more confident and mature, especially as India’s economy remains strong.

Surge in Domestic Investments

Since the start of the year, DIIs have invested ₹3,01,684 crore in Indian stocks as of August 21, which is nearly three times more than the ₹1,08,887 crore invested last year. In contrast, foreign institutional investors (FIIs) reduced their investments to ₹15,940 crore from ₹1,40,105 crore a year ago.

The strong presence of domestic investors has helped the stock market continue its rally. Since January, the Nifty 50 index has risen by 14%, while the MSCI AC Asia Pacific index has grown by 9%.

Market Resilience

Over the past four years, local investors have seen every market drop as a chance to buy more. Manuj Jain, co-head of product strategy at WhiteOak Capital AMC, noted that the market has consistently bounced back quickly after downturns. For example, after the COVID-19 crash in 2020, geopolitical tensions in 2022, global slowdown fears in 2023, and the election-related dip on June 4, the market quickly recovered and hit new highs.

As a result, the Nifty 50 index, which was at 12,182.5 points on January 1, 2020, before the pandemic, closed at 24,823.15 points recently, marking a 103.8% gain over the period. Experts believe that retail investors are now more comfortable with market corrections and are likely to keep investing through systematic investment plans (SIPs).

Retail and High Net Worth Investors Lead

Retail investors and high net worth individuals (HNIs) are the main drivers behind the DII push, according to Nitin Raheja, executive director of Julius Baer India. While short-term market fluctuations might slow down these investments, the overall trend is expected to continue growing over the long term.

Jain from WhiteOak AMC agrees, saying that this positive momentum is likely to persist unless there are major negative events. He also believes that continued market optimism could attract even more retail investors, adding to the market’s liquidity.

Economic Growth and Investor Confidence

India’s growing financial sector is channeling more savings into the stock market, according to Jay Kothari, global head of international business at DSP Asset Managers. He explained that with India’s current GDP at about $4 trillion and a savings rate of 30%, around $1.2 trillion is saved annually. If just 10% of these savings are invested in equities, it would mean $120 billion flowing into the stock market, which is a significant amount.

Kothari added that these inflows are likely to increase over time, with demand for high-quality companies outpacing supply. A positive earnings outlook for companies across different market sectors is also fueling domestic investor enthusiasm.

Resilience Amid Global Challenges

India has shown resilience over the past five to six years, despite facing global challenges like geopolitical tensions and supply chain disruptions. Regulatory reforms, a growing middle class, and trends like digitization, rising manufacturing, and a housing boom have made India more attractive than other emerging markets, said Ajay Khandelwal, fund manager at Motilal Oswal AMC.

Kothari pointed out that global investors no longer see emerging markets as a uniform group. Instead, they are looking for the best-performing economies, and India stands out with its macroeconomic stability, political stability, currency strength, and positive future outlook.

He also noted that global funds are still underinvested in India, so even if they increase their investments to match the market average, India could receive significant inflows in the coming years. He estimated that India might see $25-40 billion in foreign portfolio investments each year over the next five years, even though inflows have slowed recently.

While DII investments are generally expected to remain strong, Raheja of Julius Baer cautioned that they could slow down or face challenges if there is a significant market correction or if tax policies on equities become less favorable.