Why Is FII Pull Out Not Impacting India's Stock Markets? Deloitte Economist Explains

As uncertainty looms over global trade and manufacturing policies, particularly due to implications surrounding the former U.S. President Donald Trump ’s tariff and economic strategy, Foreign Institutional Investors (FII) have pulled out substantial capital from Indian markets. However, recent developments indicate a shift in the dynamics of India’s stock market, suggesting resilience in the face of such outflows.

Rumki Majumdar, an India Economist at Deloitte, highlighted an interesting trend: despite FII outflows being comparable to the sharp decline seen during the COVID-19 pandemic, the Indian stock market has not experienced a corresponding downturn. Majumdar attributed this unexpected stability to the rise in domestic retail investor participation and the growing role of Domestic Institutional Investors (DIIs).

"The ability of FIIs to influence the stock market has come down quite sharply," said Majumdar. “The fact that retail participation has gone up and DIIs have become a big player in ensuring stability in the capital market has changed the game.” This shift is indicative of a more resilient and diversified investment landscape, with Indian investors playing a more prominent role in stabilizing markets amidst global uncertainty.

As speculation about global trade policies continues to drive capital flight towards safer havens, such as the U.S. dollar, the increased domestic participation has acted as a buffer. According to Majumdar, this could signal a new phase for India’s capital markets, one where the dependence on foreign flows is reduced, and domestic investments drive growth.

With the Union Budget around the corner, there is growing anticipation that the government will seize this opportunity to further incentivize local investments. Majumdar speculated that policymakers might introduce measures to encourage more financialization of savings, which could lead to a continued influx of capital into the Indian financial markets.

"This is something the government might recognize in the upcoming budget and could potentially introduce incentives aimed at encouraging further domestic investment," Majumdar added.

As global markets continue to face volatility, India’s stock market is showing increasing strength from within, thanks to the growing participation of domestic players. The question now is whether the government will take steps to further bolster this trend, providing a stable foundation for India’s capital markets in the years ahead.