Indian equity markets weathered their steepest quarterly foreign sell-off of the fiscal year in January–March 2026, as domestic institutional investors (DIIs) stepped in with record net inflows to absorb the pressure, according to a report by Ventura released on Tuesday, 27 May 2026. The findings underscore a structural shift in who is anchoring Indian stock markets amid sustained global uncertainty.

FII Selling at Its Sharpest

Foreign institutional investors (FIIs) were aggressive net sellers through Q1 CY26 (January–March 2026), recording a quarterly outflow of ₹1,31,122 crore — the highest of the fiscal year. The selling was driven by a confluence of factors: elevated US bond yields, a strengthening dollar, and broadly risk-averse sentiment across emerging markets. Cumulatively, FII outflows in 2026 so far have reached ₹2,22,343 crore, already surpassing the full-year 2025 figure of ₹1,66,283 crore. In May alone, FIIs have net sold ₹30,374 crore.

DIIs Provide Record Quarterly Support

Countering the foreign exodus, DIIs delivered their strongest quarterly support of the fiscal year, with net inflows of ₹2,44,052 crore in Q1 CY26. For the full fiscal year FY26, DII inflows surged roughly 47% year-on-year to ₹8,43,206 crore, up from ₹5,71,959 crore in FY25. The Ventura report noted that robust DII buying 'more than offset sharp FII outflows amid heightened global uncertainty and risk-averse foreign investor sentiment.'

FII Outflows Moderate Year-on-Year

Despite the quarterly intensity, the broader FY26 picture shows some improvement. FII outflows moderated approximately 34% year-on-year to ₹2,64,819 crore in FY26, compared with ₹4,03,581 crore in FY25. Analysts attribute the sustained selling to weak earnings growth in India relative to competing markets, high US bond yields, and rupee depreciation — all of which have made Indian equities less attractive on a risk-adjusted basis for foreign allocators.

The Rupee Factor and SIP Flows

A separate report by Jefferies offered a counterintuitive angle on the rupee's recent weakness, suggesting it may have less to do with oil prices or the current account deficit (CAD) and more to do with domestic retail investors consistently channelling money into equities through Systematic Investment Plans (SIPs). This sustained domestic demand for equities may itself be exerting pressure on the rupee, even as it props up market indices.

What Could Bring FIIs Back

Analysts note that a stabilisation of the rupee and a meaningful improvement in India's corporate earnings growth outlook are the two most critical conditions for reversing the FII trend. Until those signals emerge, domestic flows are likely to remain the primary buffer for Indian markets. The durability of that buffer — built largely on retail SIP contributions — will be the defining test for market stability in the quarters ahead.