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Domestic institutions are outbuying foreign sellers, but Indian stocks are still sliding. With the US Federal Reserve raising interest rates for the first time in more than three years—a move that would typically draw foreign money away from emerging markets—the question is: how much protection can domestic money provide? As of 16 September, domestic institutional investors (DIIs) had bought a net ₹31,581 crore of equities during the month, comfortably exceeding foreign portfolio investor (FPI) withdrawals of ₹17,222 crore. Yet the Nifty 50 was down 3.6% since end August. The Fed’s 25-basis-point rate hike, taking the benchmark to 3.75-4.00%, arrived after Indian markets closed that day Wednesday. September flow data, therefore, shows the backdrop to the decision, rather than the market’s response to it. The rate increase was the first since July 2023. History shows why domestic buying offers reassurance, but little certainty about market direction. A Mint analysis of Bloomberg data across 21 Fed rate-hike months between December 2015 and September 2026 found that DIIs bought in all 10 months when foreign investors sold. Nifty, nevertheless, declined in seven of those months. That does not mean domestic support failed. The index could have fallen further without it. But the purchases alone were insufficient to keep the market in the positive territory. “Domestic buying can cushion the fall, but prices can still slip because buyers may only step in at lower levels,” said Prasenjit Paul, fund manager at 129 Wealth and head of research at Paul Asset. The events of September 2018 illustrate the limits. Domestic institutions bought stocks worth ₹12,504 crore, exceeding foreign withdrawals of ₹10,825 crore, but Nifty fell 6.4%, its steepest decline among the hike-months studied. Not all buying is equal Part of the explanation lies beneath the aggregate numbers: domestic buyers and foreign sellers typically may not be trading the same stocks at the same time. “The divergence comes down to where the money is landing, not just how much,” said Rajesh Singla, chief executive and fund manager at Alpha AMC. Singla said foreign selling during periods of global risk aversion can concentrate in heavyweight index stocks, while domestic purchases are staggered and spread across the market. Buying elsewhere may, therefore, do little to offset pressure on shares that exert the greatest influence on Nifty. Ashwini Shami, president and chief portfolio manager at OmniScience Capital, pointed to a similar mismatch. Mutual fund flows have favoured mid- and small-cap equities, adding that domestic funds had been net sellers of large-cap stocks over the past two months. That leaves some large companies exposed to selling from both investor groups, even while aggregate DII flows remain positive. The two groups also respond to different influences. Domestic institutions draw support from recurring savings and fund allocations, while foreign investors respond to global interest rates, bond yields and shifts in risk appetite, Shami said. For domestic buying to provide stronger support, Singla argued, attractive valuations would need to draw larger lump-sum allocations, with more money deployed in the large-cap stocks facing foreign selling. Hike may not mean automatic sell-off The historical track record also challenges the assumption that a Fed rate increase necessarily spells trouble for Indian equities. As a first reaction, Nifty 50 closed 0.2% higher on Thursday at 23,270.6 after the Fed’s overnight rate hike. Across the 21 rate-hike months studied, Nifty rose in nine and fell in 12. Foreign investors were net buyers in 10 months and net sellers in 11, while domestic institutions bought in 17. The tally includes September’s partial-month figures through 16 September, before the Fed announcement. US Fed began its post-pandemic tightening cycle in March 2022, after keeping rates near zero. It then delivered 11 increases through July 2023. During those hike months, Nifty advanced in six and declined in five. Even identical rate increases coincided with sharply different outcomes. In June 2022, a 75-basis-point hike move saw the Nifty decline 4.8%. Foreign investors withdrew ₹50,203 crore, while domestic institutions bought ₹46,599 crore. The following month, another 75-basis-point hike coincided with an 8.7% rally, the strongest in the sample. Foreign investors turned buyers, bringing in ₹4,989 crore, alongside domestic purchases of ₹11,658 crore. These full-month comparisons capture trading both before and after Fed announcements. They show how markets and flows behaved during hike months; they cannot isolate the impact of monetary policy from corporate earnings, valuations or other developments. For the current market, V.K. Vijayakumar, chief investment strategist at Geojit Investments, sees resilient domestic savings as a crucial support. “Domestic buying is holding this market,” he said, arguing that the correction would have been deeper without it. But persistent foreign selling into market rebounds limits the ability of domestic money to drive a sustained rally. Such a rally, he said, would require easing of crude oil prices, the US 10-year Treasury yield stabilizing below 5%, and stronger domestic corporate earnings. While he sees earnings improving, there is less clarity on the other two conditions. Paul of Paul Asset expects a choppy, rangebound market in the absence of a fresh major shock. Steady systematic investment plan (SIP) contributions in mutual funds will provide support, he said, adding that easing geopolitical tensions and oil prices could lead to a boost in equities even with modest foreign buying with support from domestic investments.
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