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 it 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 by employing trend analysis, Pearson’s and Spearman’s correlation analyses, phase decomposition, stationarity tests, Granger causality analysis, ARIMA modelling, and GARCH volatility estimation. Since 2021, FIIs have recorded cumulative net outflows exceeding ₹8.68 lakh crore (US$95.36 billion), while DIIs mainly 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 trend continues with SENSEX having remained above 80,000 points through 2025 despite persistent FII disengagement. The DII share of total market purchases rose from approximately 39% in 2017 to over 54% by January 2026, documenting a structural shift in market composition. The results show that DII flows have stayed positively and significantly correlated with SENSEX, with FII flows being significantly negatively correlated. Granger causality tests suggest market-responsive rather than market-driving behavior by domestic institutions. Drawing upon Minsky’s financial instability hypothesis and behavioral finance frameworks, we interpret that prolonged domestic absorption of FII exists where direct fundamental evidence is unavailable. The Minsky-type fragility interpretation is offered as a structured hypothesis for future empirical investigation. The findings carry important implications for retail investors, fund managers, and regulators.