The FII–DII Jugalbandi: Understanding Who Really Drives Indian Equity Markets
- Mar 17
- 4 min read
Updated: Mar 17
Over the past decade, one of the most important structural shifts in Indian equity markets has been the evolving balance between Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs).
For many years, FIIs were considered the primary drivers of market direction. However, the growing participation of domestic institutions, particularly mutual funds, has significantly altered market dynamics.
Understanding this interplay is critical for investors seeking to interpret market movements, assess risks, and maintain long-term discipline.
Who are FIIs and DIIs?
Foreign Institutional Investors (FIIs) represent global capital investing in Indian financial markets. These include:
Global mutual funds
Sovereign wealth funds
Pension funds
Hedge funds
Insurance companies
Their investment decisions are influenced not just by India-specific factors, but also by global liquidity conditions, interest rate cycles, currency movements and risk appetite across emerging markets.
Domestic Institutional Investors (DIIs) include:
Mutual funds
Insurance companies
Banks and financial institutions
Pension funds (such as EPFO)
Alternative Investment Funds (AIFs)
The Shift from FIIs to DIIs
As you can see above, the landscape has shifted drastically from FII-led markets to DII dominance.
FII's Historical Dominance
India had long been a capital-scarce emerging market relative to developed economies.Foreign capital therefore played an important role in market liquidity. FII behaviour used to significantly influence market sentiment. Those who have seen the markets long enough would know that large FII inflows often coincided with bull market phases, while sharp outflows were associated with corrections or crises.
Rise of DIIs
Over the past decade, India witnessed a structural shift in household savings pattern. Moderating bank deposit rates, ease of doing investments (enabled by technology), awareness programs by AMFI (“Mutual Funds Sahi hai!”), regulatory reforms and other factors, coinciding with the overall economic growth, has led to growing mobilization of funds into domestic mutual funds.
SIPs created behavioural discipline for investors and predictable inflows for mutual funds, leading to a steady demand base for equities. The average monthly SIP flow increased from ~₹7,000 crore in 2018 to ~₹29,000 crore in recent months, depicting the quantum of DII dominance.
At the same time, depreciating rupee (against the dollar), higher valuations of Indian stocks and other factors drove FII selling.
What this means for the Markets?
How does this FII-DII jugalbandi impact the markets? Let us understand this with a few examples:
Period | FII Net Flow (₹ Cr) | DII Net Flow (₹ Cr) | Market Behaviour |
|---|---|---|---|
Apr-Jun 2020 | +14,000 | +14,600 | Recovery rally (after COVID drop) |
Oct 2021 – Jun 2022 | -3,85,000 | +2,98,000 | Extreme volatility and net down move – triggered by FII sell-off |
Mar-Apr 2023 | +7,700 | +32,500 | Rally Phase |
Nov-Dec 2023 | +35,000 | +27,000 | Strong rally phase |
Jun–Jul 2024 | +7,500 | +52,000 | Rally phase |
Apr–Jun 2025 | +22,000 | +1,68,000 | Strong rally phase |
Jul–Sep 2025 | -130,000 | +2,20,000 | Market consolidation |
Oct–Dec 2025 | -54,000 | +2,10,000 | Volatility with sector rotation, and net up move |
Jan–Feb 2026 | -48,000 | +1,07,000 | Correction from highs |
Key observations from this table:
Domestic institutions have absorbed a significant portion of foreign selling pressure, especially in recent times
Market corrections have been shallower than historical FII-led selloffs, suggesting improved liquidity depth.
Things to Watch Out For?
Monthly Mutual Fund Inflow Data
AMFI releases monthly data of all mutual fund inflows. In current uncertain times, it is increasingly important to track this data for signs of resilience or weakness.
Here is why:
As you can see from the above, DIIs have helped provide relative stability to markets despite global investors selling.
Mutual Funds form an important component of DII flows. The steady and predictable flows from SIPs is one of the key enablers for mutual funds to deploy in the markets.
If there is a meaningful slowdown in SIP and lumpsum flows from MF investors – whether due to investor sentiment, market volatility or macro uncertainty – the cushioning effect provided by DIIs to the market would weaken. And if FIIs continue to be net sellers, it could trigger a fall in the equity markets.
Equity markets themselves influence investor behaviour. Prolonged volatility or drawdowns can impact investor confidence, further reducing SIP flows, triggering a ‘vicious circle’ of falling market levels.
With ongoing global geopolitical uncertainties and markets having corrected meaningfully from recent highs, tracking domestic flow resilience becomes even more relevant.
That is why the AMFI flow data for March 2026 (and subsequent months) will be closely watched for signals on whether domestic liquidity remains a stabilising force for Indian equities.
Fundamental Performance of Companies
We believe in the India growth story (we really do!). But in our (unpopular!) opinion, a part of the recent rally has been driven by liquidity (the sheer amount of money DIIs receive, that needs deployment – driving prices up).
For these market levels to sustain, one (or both) of these things need to happen:
Fundamentals of the company – earnings growth, capex, etc. need to show up consistently to justify the valuations
Liquidity or mobilization of savings (SIPs, etc.) needs to continue at the same pace
While history has scary examples of liquidity-driven rallies ending badly for retail investors – could this time be different? Because the liquidity is driven by household savings (which are in turn driven by economic growth engine) and not by scam or systemic gaming or artificial bubbles? Or not? Only time will tell.
Structured and disciplined investing (rather than FOMO-driven decisions) can help mitigate the impact of adverse market events when they occur.
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