How FII Investments Have Shaped the Indian Stock Market Over the Last 3 Years

Over the past three years, one of the most discussed forces in the Indian equity market has been the behavior of Foreign Institutional Investors (FIIs), also known as Foreign Portfolio Investors (FPIs). Traditionally seen as the “market movers,” FIIs once dictated short-term direction in Indian equities. But recent years have revealed an important structural shift, India’s markets are evolving, and their dependence on foreign money is changing.

Let’s understand what really happened.

The Three-Year Story(From Heavy Buying to Persistent Selling)

2023 – Strong Foreign Confidence

The year 2023 witnessed strong foreign participation driven by optimism around India’s growth story, stable macroeconomics, and post-pandemic recovery. FIIs invested heavily, with net inflows of around ₹1.71 lakh crore into equities. This liquidity supported market rallies and helped benchmark indices scale new highs.

Markets responded exactly as expected with banking, capital goods, and large-cap stocks leading the rally, reflecting sectors where foreign ownership is traditionally high.

2024 – A Sharp Shift Begins

In 2024, the global environment changed dramatically:

• Rising US interest rates made developed markets more attractive.

• Indian valuations appeared expensive compared to other emerging markets.

• Geopolitical risks increased global risk aversion.

As a result, foreign inflows dropped sharply and net FPI inflows fell nearly 99%, signaling a major pause in global allocations toward India.

Historically, such a slowdown would have triggered a deep correction. But something different happened this time.

2025 – Sustained FII Selling, Yet Market Resilience

The biggest surprise came in 2025.

FIIs sold aggressively, pulling out nearly ₹1.98 lakh crore, taking total selling over a 21-month period to more than ₹3.19 lakh crore.

Despite this massive withdrawal, Indian markets did not collapse.

Instead:

• Corrections were shallow.

• Markets moved sideways rather than crashing.

• Select sectors rallied whenever foreign flows temporarily returned.

For example, even short bursts of FII buying helped financial stocks surge and lifted benchmark indices during rallies in 2025.

Why Markets Didn’t Fall(The Big Structural Change)

The biggest story of the last three years is not FII selling, it is domestic buying power.

India has witnessed:

• Massive SIP inflows into mutual funds

• Rising retail participation

• Strong buying by Domestic Institutional Investors (DIIs) such as insurance companies and pension funds

Domestic investors increasingly absorbed foreign selling pressure, acting as a stabilizing force. Market participants widely observed that FIIs are no longer the sole drivers of price direction.

In simple terms: Earlier - FIIs drove markets. Today - domestic money absorbs volatility.

How the Market Reacted (A New Behavior Pattern)

Over the past three years, Indian markets have shown three clear reactions to FII activity:

1. Short-Term Volatility Still Exists

Heavy FII selling still causes sudden corrections, especially in large-cap and financial stocks where foreign ownership is high.

2. Mid & Small Caps Driven More by Domestic Flows

Segments dominated by retail and domestic institutions often remained resilient even during foreign outflows.

3. Sideways Markets Instead of Deep Crashes

Instead of sharp bear markets, India has experienced consolidation phases, markets digest valuations while earnings catch up.

Why FIIs Were Selling(It Wasn’t About India Alone)

Foreign investors were reallocating globally due to:

• Higher US bond yields

• Attractive opportunities in other markets

• Rotation toward AI and technology themes globally

• Relative valuation differences

In fact, global asset managers still view India’s long-term growth story positively despite near-term allocation shifts.

What This Means for Investors:

The last three years offer an important lesson:

• FII flows influence sentiment, but they no longer fully control market direction.

• India’s equity market has matured structurally.

• Domestic participation has become the market’s shock absorber.

For long-term investors, this transition is healthy. Markets supported by domestic savings tend to be more stable and less vulnerable to global capital swings.

The Bigger Takeaway

India is moving from an FII-driven market to a domestically anchored market.

Foreign money will continue to create volatility rallies when they buy and corrections when they sell. But the foundation of the market today rests increasingly on Indian investors themselves.

And that may be the most important evolution in Indian equities over the last decade.