The Battle of Liquidity
In the last couple of years, liquidity trends have shown a very different picture. Even as foreign investors have been pulling money out of Indian markets, domestic investors have been stepping in strongly.
In 2024, close to a billion dollars moved out, and in 2025 so far, nearly 15 billion dollars have already exited. This looks quite similar to 2022 when valuations were high after the post-COVID rally, leading to a big exit of almost 17 billion dollars.
Why FIIs Are Exiting
The common factor in all these years is valuation. Whenever markets have run too high, foreign investors have chosen to reduce their positions. In 2023, after some corrections, valuations looked fair, so FIIs returned. In 2024, they stayed more balanced. But in 2025, with prices again looking expensive, they have cut back sharply. Their approach clearly remains valuation-driven and disciplined.
The Role of Mutual Funds
On the other side, domestic mutual funds continue to push money into the market. They do not always have the choice to hold back cash since investor inflows force them to deploy funds. Fund houses also prefer continuous inflows as their earnings depend on assets under management. This often leads to more money being invested even at higher valuations, as the industry focuses on gathering size rather than pausing at stretched levels.
Insurance and Institutional Support
Apart from mutual funds, insurance companies, banks, and other financial institutions have also been large contributors in 2025. Their steady buying has created a strong base for the market, even as foreign money has been leaving. This shows how domestic savings and investments are becoming a big force, capable of absorbing shocks from global exits.
The Silver Lining Ahead
While foreign investors have been cutting back, history shows that every down cycle in their flows is followed by a strong comeback. If domestic flows remain steady and FIIs return in the next upcycle, the combined liquidity could create a sharp rally. This two-engine system—steady domestic inflows and foreign money returning—can give the market a strong lift whenever the cycle turns.
