Tariffs, global AI boom drive FPIs out; DII ownership hits record high

Foreign portfolio investors (FPIs) sharply reduced their exposure to Indian equities in FY26, with their share of holdings falling to a 13-year low in the second quarter, even as domestic institutional investors (DIIs) strengthened their grip on the market.

According to the Economic Survey 2025–26, the value share of foreign institutional investors declined to 16.7% in Q2, the lowest level in over a decade. In contrast, domestic players raised their share to a record high of 18.3%, signaling a structural shift in market ownership.

The Survey attributed the FPI outflows to multiple global and domestic pressures, including trade tariff uncertainties, a weak rupee, elevated US bond yields, and stronger investor interest in the rapidly expanding global artificial intelligence sector. Indian equities also underperformed relative to global peers, further dampening foreign sentiment.

Despite the decline, the Survey emphasized that FIIs continue to remain important participants in Indian capital markets.

Domestic and Retail Investors Step Up

The combined holdings of domestic institutions, retail investors, and high-net-worth individuals climbed to a record 27.8% in Q2, reflecting rising local participation and confidence in domestic equities.

Market Performance Muted

The first nine months of FY26 were marked by correction and consolidation. Benchmark indices Nifty 50 and Sensex gained only 10–11%, lagging markets such as the US, South Korea, Japan, China, and Singapore.

However, the market avoided a deeper decline due to supportive domestic factors, including income tax relief, GST measures, accommodative monetary policy, easing inflation, and improved corporate earnings in the second quarter.