FIIs could return to market in six months, says Ajay Bagga

India’s equity market may be entering a more resilient phase, with domestic institutional investors increasingly offsetting foreign selling pressure and limiting the risk of a steep correction. Market veteran Ajay Bagga said the worst of the foreign institutional investor sell-off appears to be behind the market, adding that a more durable turn in overseas flows could emerge over the next six months.

His comments come at a time when Indian equities are drawing renewed attention after a prolonged stretch of underperformance, even as global investors reassess overheated trades linked to artificial intelligence, semiconductors and high-growth technology markets.

Domestic money changes the market equation

Bagga underscored that the structure of foreign ownership in India is more stable than headline flow numbers often suggest. Of roughly 12,000 foreign investors in India, he said 10% are pensions and endowments and another 5-6% are sovereign funds — a cohort that is effectively “there forever” and rarely exits through open-market selling.

The more striking shift, however, is on the domestic side. “DIIs have moved to 19% plus,” Bagga said, noting that around Rs 6 lakh crore flows into Indian equities annually through domestic institutional channels. SIP assets alone now stand at Rs 17 lakh crore, reflecting the growing heft of retail-led monthly investing.

Why the sell-off has not broken the market

That domestic cushion has become critical after a bruising phase of foreign selling. Bagga pointed to heavy outflows over the past year and a half, including about Rs 1.2 lakh crore of selling in March and another Rs 69,000 crore of net outflows in May, saying “a lot of damage has been done.”

Even so, he argued that local flows have fundamentally altered market behaviour. “They cannot take over the whole heavy lifting, but they have ensured markets don’t fall very fast,” he said. That, in turn, lowers the probability of panic-led declines even when global risk appetite weakens.

What could bring FIIs back

Bagga said foreign investors now hold 15.6% of Indian market capitalisation, sharply below earlier peaks near 23%. In his view, that reduced positioning leaves room for a reversal if global conditions improve.

“I think most of it is done. When does this turn? I think it will turn in the next six months,” he said. The triggers, he suggested in the broader discussion, would likely include lower US interest rates, a weaker dollar, rotation away from the AI trade and continued earnings resilience in India.

For Indian markets, the message is significant: while foreign money still matters, the rise of DIIs and SIP investors has created a stronger shock absorber. That may not fully replace overseas capital, but it has made India’s market structure materially sturdier at a time of shifting global flows.