The return of the FIIs seems to have just begun. After relentlessly selling Indian equities through the entire year in 2025 and the first half of the year 2026, a change of direction is beginning to be seen. So, what are they buying now? What will they buy if they decide to invest more aggressively in Indian markets? The FIIs may not necessarily buy the shares they sold in the last 18 months. They may want to buy into a completely different stock universe. The problem statement can be framed like this.
The ownership of largecaps by FIIs has never been this low in a long while. On the one hand, the stocks that are very liquid aren’t looking attractive to the FIIs.
On the other hand, the liquidity in stocks they want to buy seems to be running low. The impact costs are likely to be very high if they choose to buy midcaps or smallcaps.
It remains to be seen how FIIs deploy fresh capital in India. Where the fresh FII money goes will decide how impact costs play out, where liquidity will drive valuations, and how domestic investors react to FII buying interest.
When FIIs traded heavily only in largecaps, it was easy for DIIs to supply shares or absorb supply and provide liquidity as a stable counterparty. But, if the FII interest shifts to midcap and smallcap stocks, we could be in a very interesting situation. The oversubscribed larger IPOs, newly listed well-capitalised companies, and block deals in recent listings post the lock-in periods are all showing early signs of things to come. When money returns to India, they need to be watched closer. Follow the money to know where this market is moving.
