Economic Survey 2026 underlines mutual funds' role in DII dominance amid FPI sell-off

The Economic Survey 2025–26 highlights heightened volatility in India's foreign portfolio investment (FPI) trends during FY26, shaped by shifting global financial conditions, currency movements and relative market performance.

"India's FPI trends in FY26 exhibit volatility. During Q1 FY26, FPIs were net buyers of Indian equities and net sellers of debt instruments. In contrast, in Q2 FY26 and Q3 FY26, they transitioned from being net buyers of equities to net sellers, while being net buyers of debt instruments. As of 13 January 2026, FPIs are net sellers of Indian equities with outflows amounting to Rs 16,500 crore."

The Survey notes that overall, FPIs remained net sellers of Indian securities between April and December 2025. The outflows were driven by a combination of factors, including the relative underperformance of Indian equities compared to other major global markets, trade and policy uncertainties, depreciation of the rupee and a broad-based global risk-off environment amid elevated US bond yields. These dynamics weighed particularly on export-oriented sectors such as IT and healthcare, leading to sustained equity outflows during the period.

The Survey also shows movements in the India–US bond yield spread. "In late May 2025, the spread between 10-year Indian and US government bond yields narrowed to 165 basis points (bps) amid a stronger US dollar and falling Indian yields, reducing the relative attractiveness of Indian debt." However, conditions shifted later in the year.

"By the end of 2025, as Indian yields rose and the dollar weakened, the spread widened to 250 bps, improving the appeal of Indian bonds. Supported by Sebi's relaxation of FPI investment norms and ongoing India-US trade discussions, the outlook for FPI inflows into India's debt market remains positive."

As of December 31, 2025, the asset base under custody of FPIs stood at Rs 81.4 lakh crore, a 10.4 per cent increase over March-end 2025, driven by equity valuation gains and steady debt accumulation. Despite this, FPI ownership in NSE-listed equities declined to 16.9 per cent in Q2 FY26.

DIIs emerge as key stabilisers

The Survey underscores the growing role of domestic institutional investors (DIIs) in offsetting foreign outflows. "In the midst of volatile foreign capital flows, DIIs, particularly mutual funds and insurance companies, have counterbalanced the volatility of foreign investment outflows and have provided much-needed support to the markets."

As of September 30, 2025, DII ownership in NSE-listed equities stood at 18.7 per cent. In Q2 FY26, DIIs' share by value of holdings rose to 18.3 per cent, surpassing FIIs at 16.7 per cent, a 13-year low. The combined holdings of DIIs, retail investors and high-net-worth individuals reached an all-time high of 27.8 per cent.