Domestic flows to continue as FII outflow pressure easing: Buoyant Capital's Jigar Mistry

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  Stocks and Investing on Thu, Oct 23rd, 2025 by moneycontrol.com

Domestic Investors Steer Indian Equity Markets Amid Easing FII Outflow Pressure

The Indian stock market has been on a steady climb this quarter, propelled largely by a surge in domestic investment flows. This uptick comes as foreign institutional investors (FIIs) are gradually pulling back, driven by a global shift in risk sentiment. According to Jigar Mistry, a senior market analyst at Capillary Insights, the current environment is “buoyant” for domestic capital, which is looking for higher returns in a low‑interest‑rate backdrop.

Rising Domestic Capital Inflows

Over the past month, domestic mutual funds and large‑cap households have channeled billions of rupees into equities. The trend is evident in the Nifty 50’s recent rally, where it has been trading near its all‑time high, driven by a combination of robust corporate earnings and positive policy expectations. The Nifty Bank index has also been outperforming, benefiting from rising lending volumes and better-than‑expected profit outlooks from major banks.

“Domestic investors are now looking for assets that provide a better risk‑return profile,” Mistry notes. “They see equity as a more efficient vehicle compared to fixed income, especially when policy rates are unlikely to rise for the foreseeable future.” The increased appetite has helped cushion the market against the relatively high outflow levels from FIIs, which have been a concern for several weeks due to global equity sell‑offs and a rally in U.S. Treasury yields.

FII Outflow Pressure Eases

FIIs have historically been a significant driver of capital in Indian markets. However, in recent weeks their net outflows have moderated. The outflow was partly driven by the rising U.S. dollar and concerns over a tightening monetary stance in the United States, which raised borrowing costs for Indian corporates. Yet, the outflow has been easing as global risk appetite stabilises, and investors are re‑evaluating the attractiveness of Indian equities given strong fundamentals.

According to the Reserve Bank of India’s data, FII outflows were down to 9.5 % of net total inflows in the latest week, a noticeable improvement from the 12.4 % seen in late March. This easing has helped reduce the volatility that FIIs typically bring, allowing domestic funds to have a larger influence on market direction.

Market Drivers and Sectors to Watch

Several sectors have benefited from the current environment. The financial sector, particularly banks, has seen a significant lift in share prices. With the Reserve Bank of India’s latest policy statement keeping the repo rate unchanged, banks are expected to enjoy improved net interest margins. The information technology (IT) sector has also been in the spotlight, with major IT firms reporting strong quarterly earnings and an increase in overseas contract wins.

FMCG companies have also outperformed, riding on domestic consumption strength. Pharma stocks have seen a moderate lift after the approval of several new drug patents, which improves the growth outlook for the sector. Energy stocks have shown resilience despite global oil price volatility, thanks to domestic policy support for renewable energy and infrastructure spending.

Investor Sentiment and Policy Outlook

The overall sentiment in the market has improved. Analysts suggest that the government’s recent measures to simplify tax compliance and ease foreign direct investment norms have helped boost investor confidence. Additionally, the recent push to digitise banking and the increased focus on sustainability initiatives have added to the positive tone.

Mistry emphasizes that while domestic flows are strong, they are still vulnerable to global macro‑economic changes. “We will continue to monitor the U.S. Fed’s decisions closely,” he says. “If the U.S. raises rates aggressively, it could compress equity valuations again.”

Looking Ahead

The current momentum appears sustainable in the short term, especially as domestic investors continue to allocate capital toward growth-oriented sectors. The Indian market’s ability to attract domestic capital, even as FII outflows moderate, is a testament to the resilience of the economy’s fundamentals.

Investors looking forward to capitalising on this trend should keep an eye on key indicators such as the repo rate, corporate earnings reports, and the global monetary policy environment. Sectors with the most potential for upside include banking, IT, FMCG, and energy, all of which are underpinned by strong domestic demand and favourable policy support.

In conclusion, the Indian equity market’s current phase of domestic capital inflows, coupled with easing FII outflow pressure, provides a supportive backdrop for continued market growth. The buoyancy in capital allocation suggests that investors remain optimistic about the country’s medium‑term prospects, making it a fertile ground for strategic positioning in equity portfolios.