From FII Dependence to DII Dominance: Behavioral Dynamics and Minskyan Risk in India’s Stock Market

This study examines how market leadership in Indian equities has structurally shifted away from Foreign Institutional Investors (FIIs) toward Domestic Institutional Investors (DIIs) and Mutual Funds (MFs), and evaluates the systemic risks created by this rebalancing. Using monthly transaction data from April 2007 to January 2026, we analyze evolving investment patterns among FIIs, DIIs, and MFs through trend analysis, Pearson and Spearman correlations, and phase decomposition. Since 2021, FIIs have recorded cumulative net outflows exceeding ₹8.68 lakh crore (US$ 95.36 billion), while DIIs—led by Mutual Funds financed largely through Systematic Investment Plans (SIPs)—have made net purchases of over ₹19.37 lakh crore (US $212.67 billion) , effectively absorbing FII selling and helping to maintain elevated index levels. The SENSEX remained above 80,000 points through 2025 despite persistent FII disengagement. We find that DII flows are positively and significantly correlated with SENSEX levels (r = 0.686, p < 0.001), whereas FII flows are significantly negatively correlated (r = −0.365, p < 0.001). The DII share of total market purchases increased from roughly 39% in 2017 to more than 54% by January 2026, highlighting a growing structural reliance of Indian equity markets on domestic liquidity. Drawing on Minsky’s financial instability hypothesis and behavioral finance perspectives, we argue that prolonged, sentiment‑driven domestic absorption of FII exits, in the absence of corresponding gains in corporate fundamentals or earnings, represents an emerging source of systemic vulnerability, with important implications for retail investors, fund managers, and regulators.