The stock market is reeling under a bear run since October with market capitalisation falling by about $1 trillion, but domestic institutional investors believe quality stocks are available cheap, and continue to buy, betting for the long-term.
Since the September peak, foreign institutional investors (FIIs) have been at the forefront of this sell-off, liquidating stocks worth Rs 3.42 lakh crore since October 2024. This has led to a sharp 15 per cent-plus fall in the key market indices Nifty and Sensex. A record number of investors across small cities and towns who entered the market last year through the mutual fund route also burnt their fingers.
But domestic institutional investors (DIIs), led by state-owned LIC and other insurance companies, have been absorbing the shock, purchasing stocks worth Rs 3.61 lakh crore at rock-bottom valuations during the same period. “We are contrarians… we buy when others sell. We have a longer holding period which can last several decades,” said a top executive of a leading insurance company.
Despite this, the market has remained in bear territory for over five months. The trend of FII selling continued in early March, but there are signs of a slight decline in intensity over the last couple of days. FIIs have sold equity worth Rs 1,37,354 crore in calendar year 2025 alone.
Consequently, FIIs in Indian equities have reached multi-year lows due to significant selling, and investors are likely to await signs of recovery before re-entering the market. Until then, volatility in Indian markets is expected to continue due to ongoing global and domestic challenges.
While domestic institutions have been accumulating stocks, the sentiment has remained weak due to global and domestic factors.
Vipul Bhowar, Senior Director – Listed Investments, Waterfield Advisors, said, “Elevated valuations of Indian equities, alongside concerns about corporate earnings growth, have led to a sustained outflow of FIIs. The earnings reports for the third quarter of fiscal year 2025 have been modest, indicating an atmosphere of uncertainty.” Further, revisions to forward earnings have struggled, with downgrades outpacing upgrades, particularly among companies outside the Nifty 50 index.
This issue is further compounded by falling commodity prices and reduced consumer spending, which adversely impact corporate profits and diminish the appeal of Indian equities to foreign investors. The market sell-off was influenced by rising US bond yields, strengthening US dollar, and global economic uncertainties, leading to a shift in investor focus towards US assets.
US bonds currently offer attractive yields without the volatility or currency risk associated with emerging market equities. In addition, US interest rates have risen.
Additionally, the 3 per cent rupee depreciation has eroded returns for FIIs. Moreover, India levies taxes of 12.5 per cent on long-term and 20 per cent on short-term capital gains for FIIs, whereas alternative markets offer zero or lower tax environments. “These factors may have incentivised FIIs to allocate funds where they find valuation comfort and prompted them to reallocate investments to markets offering potentially better returns, such as China, the US, Brazil, or Thailand,” said Vaibhav Porwal, Co-Founder, Dezerv.
Interestingly, the sell-off over the last five months has occurred at a time when the number of investors in the Indian stock market has reached an all-time high. The National Stock Exchange of India (NSE) announced that its registered investor base surpassed 11 crore unique investors as of January 20, 2025. The total number of client accounts registered with the exchange has also crossed 21 crore, marking a significant milestone in India’s capital market growth. Between 2020 and 2024, as many as 16.13 crore client accounts were opened, reflecting the growing interest in the Indian stock market.
Mutual fund houses also bore the brunt of the sell-off. The stock market crash has dealt a heavy blow to the mutual fund industry with assets of retail investors in various funds plummeting by Rs 2.33 lakh crore and inflows into small-cap and mid-cap schemes plunging by up to 34.9 per cent in the month of February.
ExplainedDIIs vs FIIs plays out in market
HIGH valuations, lacklustre corporate results, and a slowing economy prompted FIIs to pull out from stock markets. Recession fears in the US amid Trump’s tariff policies have not helped either. But in this bear market, domestic institutional investors led by insurers have bought at every dip, given their capacity to hold a long-term bet.
In the previous market crash, stock market indices plummeted worldwide, including India, between January and October 2022. The decline was due to high inflation and increase in interest rates amid fears of a global recession and weak economic indicators.
This time around, there is big buying in Chinese stocks triggered by attractive valuations and expectations from the recent positive initiatives by the Chinese government towards its big businesses. The rally in Chinese stocks has resulted in the Hang Seng Index performing exceedingly well with year till date (YTD) return of 23.48 per cent as against -5 per cent YTD return in Nifty. This is more likely to be a short-term cyclical trade since Chinese corporate earnings have continuously disappointed since 2008. However, the recent decline in the dollar index will limit the fund flows to the US.
US President Donald Trump’s tariff threats have changed the focus of investors’ choice towards domestic consumption driven sectors like financials, telecom, hotels and aviation and away from externally linked sectors. This trend is volatile like Trump’s tariff policy.
High valuations, lacklustre corporate results, and a slowing economy prompted FIIs to pull out from stock markets. Recession fears in the US amid Trump’s tariff policies have not helped either. 
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