Why DII cushion, FPIs’ IPO preference have not stopped rupee’s slide

India’s equity markets are witnessing a notable shift in investment patterns, with foreign portfolio investors (FPIs) turning net sellers while domestic institutional investors (DIIs) increasingly absorb the selling pressure. Meanwhile, FPIs continue to invest in Indian initial public offerings (IPOs), attracted by potentially more favourable valuations and exposure to emerging sectors.

However, while domestic buying can support equity prices, it cannot directly offset the demand for dollars generated by FPI selling. That demand has been much larger than foreign investment in the primary market, leaving the rupee vulnerable to external pressures. With the US Federal Reserve and the Reserve Bank of India raising policy rates, capital flows face competing pressures, adding to uncertainty around the outlook for Indian equities and the rupee.

Continuing DII cushion

The investment stance of FPIs and DIIs in Indian equities has become increasingly divergent, particularly over the past five years. While FPI flows have fluctuated considerably, DII investments have gained momentum, providing support to the domestic stock market.

The divergence was particularly pronounced in 2025, when FPIs recorded net equity outflows of $18.9 billion, while DII inflows surged to a record $90.1 billion. In 2026, FPIs have net sold $27.8 billion worth of Indian equities until September, while DIIs have reportedly pumped in $27.8 billion.

The foreign sell-off has been driven by weak corporate earnings, premium valuations of Indian equities, US tariffs, and the rupee’s depreciation against the dollar. In contrast, sustained domestic investment, supported by mutual fund contributions, has helped absorb a significant part of the foreign selling. This marks a shift from earlier years, when foreign investors were a more consistent source of equity inflows. Domestic capital is therefore playing an increasingly important role in supporting Indian equities amid volatile global investment flows.

Steady inflows

DIIs comprise mutual funds, insurance companies, banks, pension funds and other domestic financial institutions that channel domestic savings into financial markets. Among these, mutual funds play an important role in directing household savings into equities, with systematic investment plans (SIPs) emerging as a significant mechanism for mobilizing these savings.

The total amount collected through SIPs increased from ₹0.4 trillion in 2016-17 to ₹3.5 trillion in 2025-26. The figure stood at ₹1.6 trillion until August in FY27.

By allowing investors to contribute fixed amounts to mutual funds at regular intervals, SIPs provide a recurring source of funds that enables mutual funds to sustain investment activity even when FPIs withdraw capital from Indian markets. Moreover, SIP contributions are spread across a large base of domestic retail investors and are less sensitive to short-term market fluctuations than foreign portfolio flows, which can reverse rapidly in response to changes in global risk appetite. The growing popularity of SIPs has therefore broadened the domestic investor base and strengthened the role of household savings in supporting Indian equities.

Primary preference

While FPIs have largely been net seller in Indian equities in 2026, they have continued to channel substantial sums into the primary market, reflecting a growing preference for selective initial public offering (IPO) investments over purchases of stocks on exchanges.

Between September 2025 and September 2026, foreign investors recorded net inflows into the primary market in every month, while their secondary-market investments fluctuated sharply, with outflows in most months. Expensive valuations in the secondary market are among the factors driving this divergence.

Despite global headwinds, listed equities have not corrected sufficiently to offer foreign investors more attractive entry points. IPOs, by contrast, allow investors to evaluate companies at the time of issuance and assess whether the offer price provides an attractive entry valuation.

They also offer access to companies in emerging sectors, including fintech, consumer technology, electric mobility, electronics manufacturing and renewable energy, some of which may be underrepresented in benchmark indices. However, despite being more steady, primary market inflows have not large enough to offset the outflows in the secondary market.

Selective flows

Beyond the net selling on a broader level, a sector-wise analysis of FPI holdings reveals a high concentration of foreign investment in a handful of industries.

Financial services accounted for 30.2% of FPI equity assets under custody as of the end of September, followed by healthcare (8%), automobiles and auto components (7.5%), capital goods (7.4%), and oil, gas and consumable fuels (6.5%). Together, these five sectors accounted for around 60% of foreign investors’ equity holdings.

However, this concentration has not insulated these sectors from selling pressure. Between April and September 2026, financial services recorded net FPI equity outflows of ₹53,973 crore, amid concerns over valuations and earnings prospects. Oil, gas and consumable fuels witnessed outflows of ₹37,828 crore, reflecting uncertainty over crude oil prices and input costs. Automobiles and auto components also recorded outflows of ₹26,049 crore, as elevated metal and raw material costs threatened to squeeze manufacturers’ margins. In contrast, healthcare attracted net inflows of ₹5,994 billion, reflecting relatively resilient demand.

These divergent flows suggest that foreign investors are reassessing their sectoral exposure based on valuations, cost pressures and earnings prospects.

Rupee repercussions

Even when FPIs invest more in primary markets and domestic investors increasingly absorb FPI selling in Indian equities, overall foreign capital outflows are exerting pressure on the Indian rupee.

When FPIs sell Indian shares, they receive rupees, which they convert into dollars to repatriate their investments or redeploy capital overseas. This generates additional demand for dollars in the foreign exchange market, putting pressure on the rupee, particularly when other foreign exchange inflows are insufficient to offset these outflows.

In contrast, DIIs and retail investors investing through SIPs deploy funds largely in rupees. While their investments can absorb some of the selling pressure in equity markets, they do not directly provide the dollars required by exiting foreign investors. Consequently, domestic buying can help support share prices without necessarily easing pressure on the currency. FPI outflows in recent months have therefore contributed to the rupee’s slide, alongside other factors such as movements in the US dollar, global interest rates and trade dynamics.

Puneet Kumar Arora is an assistant professor of economics at Delhi Technological University. Jaydeep Mukherjee is a professor of economics at Great Lakes Institute of Management, Chennai.