When homegrown capital outgrows foreign funds: Can India fund its own growth?

India's Capital Markets: A Historic Shift in Ownership

In a remarkable turnaround, domestic institutional investors (DIIs) have surpassed foreign portfolio investors (FPIs) in their shareholding of National Stock Exchange (NSE)-listed companies. This pivotal shift signifies a major leap forward in the maturity of India's capital markets.

A New Era of Domestic Dominance

Prime Database's March 2025 data reveals DIIs holding a 17.62% stake, edging out FPIs at 17.22%. This seemingly small 40 basis point difference represents a profound structural transformation. After decades of FPI dominance, Indian capital is firmly taking center stage.

• The Rise of DIIs: Since 2020, DII ownership has more than doubled, from 13.58% to 17.62%, fueled by increased mutual fund investments and higher equity allocations from institutions like EPFO and LIC.
• The Decline of FPIs: FPI stake has steadily decreased from over 21% in 2020, primarily due to global monetary tightening, rising interest rates, and geopolitical uncertainty.

Mutual Funds: A Key Driver

The surge in mutual fund investments has been instrumental in this shift. Assets under management (AUM) have skyrocketed from ₹22 lakh crore in 2020 to over ₹60 lakh crore by December 2025 (AMFI data). The impressive ₹25,926 crore collected through Systematic Investment Plans (SIPs) in March 2025 underscores a burgeoning retail investor revolution.

Resilience in the Face of Global Uncertainty

The impact of this shift was evident in 2022 when FPIs withdrew nearly ₹1.21 trillion from Indian equities. Yet, the Indian market remained surprisingly resilient, with the Nifty 50 delivering a 20% return in 2023. This resilience can be attributed to DIIs and retail investors absorbing the market dips, shielding it from global shocks.

A Strong Negative Correlation

The traded volume of FPIs and DIIs in Indian equities shows a strong negative correlation of -0.85 over the last 100 months (ending April 2025), strengthening to -0.96 over the last 12 months.

India's Growing Self-Reliance

This behavioral shift challenges the long-held belief that India's equity market relies on foreign capital. A large, committed domestic investor base, confident in India's long-term fundamentals, is now the new reality.

Increased Institutional Activism

This increased domestic ownership has significant implications for corporate governance. DIIs are increasingly advocating for transparency, ESG adoption, improved board practices, and responsible capital allocation. Institutional activism, previously a hallmark of global investors, is gaining traction among Indian institutions.

Looking Ahead: Challenges and Opportunities

While this is a momentous achievement, challenges remain. The sustainability of retail flows into mutual funds during market corrections needs to be monitored. FPIs could also swiftly return if global conditions improve. Further reforms, including increased retirement fund participation, incentives for long-term investing, robust investor protection, and consistent regulation are crucial to ensure the continued success of this remarkable transformation.

A New Era of Confidence

For years, India sought validation from foreign capital. This shift signifies a deeper truth: confidence in India's future is now homegrown. For the first time, Indian savings are aligning with Indian aspirations. In a world of uncertainty, this homegrown conviction is perhaps India's most valuable asset.

Pratibha Kumari is an assistant professor at TAPMI Bengaluru and Nishat Alam Choudhury is a postdoctoral researcher at Aalto University, Finland.