The ongoing battle between Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) has been intense over the past few months. From October 2024 to February 2025, FIIs have been aggressively selling, while DIIs have been countering with strong buying. In October, FIIs offloaded ₹1.14 lakh crore, and DIIs purchased ₹1.07 lakh crore. A similar pattern followed in the subsequent months, with FIIs selling in large numbers and DIIs absorbing most of it. However, sentiment in the market is largely driven by FIIs, and their persistent selling continues to weigh on the broader trend.
Why Are FIIs Selling?
Looking from an FII perspective, their returns in dollar terms have been flat over the last three years. The Nifty in dollar terms (Nifty/USDINR) is at the same level as it was in 2022, meaning foreign investors haven’t seen meaningful gains from India. In contrast, the U.S. market has significantly outperformed in the same period. If we extend the timeframe to five years, FIIs have earned roughly 8% CAGR in dollar terms, while the U.S. markets have returned 9-10% CAGR or more.
FII Redemptions and Market Perception
FIIs are not a single entity; they consist of thousands of funds managing other people’s money. Many of these investors might be facing redemption pressure, where their investors are asking them to withdraw from India due to the lack of significant returns in recent years. This kind of pressure is cyclical and is seen in different phases of the market. As soon as momentum returns and Indian equities start showing stronger relative performance, FIIs will likely re-enter the market.
When Will the Cycle Turn?
The U.S. market has been exceptionally strong, and a strong U.S. dollar has further driven flows away from emerging markets like India. However, cycles eventually turn. As of March 7, 2025, there are early signs that this trend may be reversing, and money may start flowing back into emerging markets. This cycle has repeated multiple times in the past, and just as FII selling has been aggressive, the return of FII inflows can also be strong once the environment becomes favorable again.
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