Why is Indian stock market lagging global peers despite heavy domestic institutional buying?
The Nifty has lost 3.6% over the last one and a half months and currently trades at a three-month low. In contrast, China's Shanghai Composite Index has jumped 7% in the same period, touching its highest level since November 2024 in today's session.
Other major Asian exchanges have also advanced, with Hong Kong's Hang Seng gaining 6% and reaching its highest level since October 2021, while South Korea's Kospi has soared 5% and is just a few steps away from its previous record high.
Meanwhile, Japan's Nikkei share average breached the 43,000 mark for the first time in today's session, hitting 43,418 and gaining 8% since July, with the broader Topix index also scaling a fresh all-time peak.
In the US, the Dow Jones Industrial Average and the S&P 500 closed at record levels in the previous session, rising 8.2% and 4% since July, respectively, while the tech-heavy Nasdaq has climbed to a fresh peak, gaining 5.1% during the same period.
The sharp contrast in the Indian stock market comes despite massive domestic institutional buying, supported by robust inflows into mutual funds. So far in August, FPIs have sold equities worth ₹ 18,620 crore through the exchanges, a figure completely overshadowed by strong DII purchases of ₹ 46,272 crore.
Explaining this divergence, Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said US President Donald Trump's harsh tariffs and the strain in US–India relations have dampened market sentiment, leading to a build-up of short positions that have dragged the market lower.
Tepid earnings growth, elevated valuations, and a modest FY26 earnings growth projection of 8–10% have further emboldened bears. However, he said a sudden sentiment shift could trigger short covering and a sharp rebound. While the upcoming Trump–Putin talks might serve as a positive catalyst, their outcome remains uncertain.
According to Vijayakumar, this is an opportune time for asset allocation, with long-term investors (three years and above) advised to accumulate fairly valued large caps in banking, telecom, capital goods, aviation, and select mid-cap IT, where the risk–reward balance remains attractive.
Despite multiple headwinds weighing on the Indian stock market, domestic institutional investors (DIIs), largely comprising mutual funds, have recorded unprecedented inflows in July, pouring ₹ 61,000 crore and they bought local stocks additional worth ₹ 46,275 crore in August so far, taking their year-to-date inflows to ₹ 4.64 lakh crore, the highest-ever annual tally.
This figure is nearly three times higher than the foreign portfolio investor (FPI) outflows of ₹ 1.65 lakh crore in 2025 so far.
DIIs began the year by aggressively acquiring shares worth ₹ 86,591 crore in January, followed by another ₹ 64,853 crore in February. While inflows softened over the next two months, they picked up pace again in May and June, with ₹ 67,642 crore and ₹ 72,673 crore, respectively, largely driven by a surge in block deals.
Strong DII inflows have not only cushioned the impact of FPI selling but also led to a notable shift in institutional holdings across India Inc. DII ownership in the June 2025 quarter rose 170 basis points year-on-year (YoY) to an all-time high of 19.4%.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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