A week is a long time in the stock market. A lot can actually happen. And a lot will happen when you least expect it. Sentiment can change, confidence can come back, and flows can reverse sharply.
India has not been at the receiving end of positivity from global investors in a long time. Our domestic investors have kept their faith in Indian equities and become the bulwark of the market. They kept buying against all odds. In recent months, our market commentators and opinion makers had almost completely given up on FIIs turning bullish in Indian equities for the foreseeable future. We had taken it for granted that FII selling would continue unabated, keeping our blue chips and index bellwether stocks down under persisting pressure.
The defeat of the Republican Party in the U.S. midterm polls turned things around for India. Clearly and visibly so, FIIs have turned bullish on India almost overnight. Orders are flowing thick and fast into Indian broker desks from FIIs. Importantly, these are big buy orders in Indian large-cap stocks. This sudden trend reversal has caught the domestic investors off guard. On the one hand, domestic money had avoided large-cap stocks, believing that FIIs would continue selling them. So domestic investors are hardly well positioned to benefit from this sudden reversal in FII stance. In fact, the domestic investors’ portfolio positioning heavily leans on mid-cap and small-cap stocks. And the visible FII buying in large caps has caught domestic investors, brokers and managers completely off guard.
The initial DII reaction seems to be to supply and sell large caps to FIIs. However, this reaction clearly underestimates the seriousness of the FIIs regarding Indian equities. DIIs still seem to think this buying, like all the recent buying bouts of FIIs, may not sustain for long. The DIIs expect buying to reverse within a short time frame and FII selling to resume. DIIs also have another peculiar problem. While domestic fund flows remain strong, most of the local money is coming into small-cap and mid-cap funds where FII buying may not be as strong. So, domestic investors have mostly been buying stocks that global investors may be less keen on.
Now, given the magnitude of FII buying in Indian large caps, it may be difficult for domestic investors to quickly realign portfolios. The lack of liquidity in small caps is a serious issue, and impact costs will be high for investors wanting to switch back into large caps. The coming weeks will be decisive in setting the market direction, firming up the uptrend and making investors accept the new market reality. 2026 has been a year of extraordinary shifts in asset prices and preferences.
