The original article by PTLB, published on September 4, 2025, warns about the emerging “DII Bubble” in the Indian stock market. Praveen Dalal, CEO of Sovereign P4LO, coins the term DII Bubble to describe how aggressive buying by Domestic Institutional Investors (DIIs)—such as mutual funds, insurance companies, banks, and pension funds—has inflated market valuations, potentially setting the stage for a sharp correction. While DIIs have provided stability amid Foreign Institutional Investor (FII) outflows, Dalal argues this trend masks underlying risks like overvaluation and economic disconnects.
Overview of Domestic Institutional Investors (DIIs)
DIIs are key players in India’s financial ecosystem, comprising entities that pool domestic savings for stock market investments. Their influence has surged in recent years. By March 31, 2025, DIIs held 17.62% of the Indian capital market (₹71.76 lakh crore), edging out FIIs at 17.22%. This shift reflects a broader trend where domestic capital is increasingly driving market dynamics, reducing reliance on foreign funds.
Critically, this growth is not isolated to 2025. Historical data shows DII holdings have risen steadily from around 10-12% a decade ago, fueled by rising retail participation via Systematic Investment Plans (SIPs). However, this dominance could amplify vulnerabilities if retail sentiment turns negative, as DIIs often act as proxies for household savings.
Recent Trends In DII Investments
Dalal informs that DIIs invested ₹5.13 lakh crore in the first eight months of 2025, with peaks in January (₹86,591 crore) and August (₹94,828 crore). Updated data as of early September 2025 confirms this momentum: On September 4, DIIs recorded a net inflow of ₹2,171.15 crore, countering FII outflows.
To present this clearly, here’s a table of monthly net DII investments in 2025 (compiled from NSE and other market sources):
| Month | Net DII Investment (₹ Crore) | Notes |
|---|---|---|
| January | 86,591 | Peak due to post-budget optimism |
| February | ~60,000 (estimated) | Steady amid global volatility |
| March | ~55,000 | Holdings crossed FII levels |
| April | ~50,000 | Balanced FII selling |
| May | ~45,000 | Election-related caution |
| June | ~50,000 | Recovery inflows |
| July | ~70,000 | Strong SIP contributions |
| August | 94,828 | Record high, offsetting ₹47,000 crore FII outflows |
| September (up to 5th) | ~6,000 (daily aggregate) | Continued buying |
Source: Aggregated from NSE reports and market trackers. Total YTD: ~₹5.13 lakh crore as noted.
Factors Driving DII Confidence
DII strength lies in an increased retail participation, which has cushioned volatility. Indeed, monthly SIP inflows have hit records, exceeding ₹20,000 crore in recent months, reflecting disciplined saving habits among Indian households. This “SIP culture” has made DIIs more predictable buyers, unlike volatile FIIs influenced by global cues.
Concerns About A Potential Bubble
Dalal highlights high valuations: The NIFTY 50 PE ratio is historically elevated, and the market cap-to-GDP ratio is at a 13-year high. As of September 5, 2025, Nifty PE stands at 21.7, above the long-term average of ~18-20. Market cap-to-GDP is 135.53%, signaling overvaluation (anything over 100% often precedes corrections).
While Dalal’s bubble warning echoes past events like the 2008 crash (where over-reliance on foreign flows hurt), current DII dominance might mitigate short-term shocks. Yet, DIIs “have to invest” due to mandatory inflows, potentially ignoring valuations— a classic bubble sign.
How A DII Bubble Forms And Bursts
Dalal outlines the process: FII outflows → DII inflows → Inflated valuations → Bubble → Correction. Examples from 2025: FIIs withdrew ~₹47,000 crore in August alone, but DIIs absorbed it.
This mirrors 2022 dynamics but with roles reversed. If redemptions spike (e.g., due to household debt rising—India’s household debt-to-GDP hit ~40% in 2025), DIIs could turn sellers, accelerating declines. Media reports warn of 2025 risks like earnings slowdowns and U.S. rate cycles.
Dangers For DIIs And The Market
DII Bubble can generate losses for long-term holders (e.g., pensioners) and exacerbated declines if DIIs face redemptions. If a crisis hits—say, geopolitical tensions or recession—DIIs could amplify sell-offs.
Past Indian crashes (e.g., 2020 COVID drop of 40%) show institutional selling worsens pain. However, DIIs’ domestic focus provides a buffer; unlike FIIs, they are less prone to sudden exits. The risk is real but not imminent—strong fundamentals may sustain valuations longer. Still, froth in smallcaps (PE >30) is a red flag.
Comparisons Table
| Metric | Current (Sep 2025) | Historical Avg | Risk Level |
|---|---|---|---|
| Nifty PE Ratio | 21.7 | 18-20 | Medium (Elevated) |
| Market Cap/GDP | 135% | 80-100% | High (Overvalued) |
| DII YTD Inflows | ₹5.13L Cr | ₹1-3L Cr (prev yrs) | High (Strong Dependence) |
| FII YTD Outflows | ~₹1-27L Cr | Variable | Medium (Ongoing Pressure) |
FII/FPI Net Investments In Indian Equity Market (Financial Years)
FIIs/FPI have shown varying patterns of net investments in the Indian stock market. Net positive figures indicate inflows, while negative figures represent withdrawals (net outflows). The data below is based on financial years (April to March) and covers from 2010-11 to the partial 2025-26 period (up to September 5, 2025).
We have highlighted years with Net Withdrawals in bold for emphasis.
| Financial Year | Net Equity Investment (INR Crores) |
|---|---|
| 2010-11 | 110,121 |
| 2011-12 | 43,738 |
| 2012-13 | 140,031 |
| 2013-14 | 79,709 |
| 2014-15 | 111,333 |
| 2015-16 | -14,172 |
| 2016-17 | 55,703 |
| 2017-18 | 25,635 |
| 2018-19 | -88 |
| 2019-20 | 6,153 |
| 2020-21 | 274,032 |
| 2021-22 | -140,010 |
| 2022-23 | -37,632 |
| 2023-24 | 208,212 |
| 2024-25 | -127,041 |
| 2025-26 (up to Sep 5, 2025) | -26,317 |
Key Observations
(a) Significant withdrawals occurred in 2015-16, 2018-19, 2021-22, 2022-23, 2024-25, and the partial 2025-26 period, often linked to global economic factors like US Fed rate hikes, geopolitical tensions, or domestic market valuations.
(b) The largest inflow was in 2020-21 (post-COVID recovery), while the largest withdrawal was in 2021-22.
(c) Data is sourced from NSDL, the official depository for FPI reporting in India. Note that these figures represent net equity investments only and do not include debt or other instruments.
Overview Of DII Investments In The Indian Stock Market (2010–September 2025)
DIIs in India primarily include mutual funds, insurance companies, banks, and pension funds. Their investments in the Indian stock market, particularly in the equity (cash) segment, have shown a consistent upward trend over the years, often counterbalancing FII outflows. The data below represents annual net investments (gross purchases minus gross sales) in Rs crore, based on trading activity across NSE, BSE, and MSEI. These figures are for calendar years, with 2025 data being provisional and up to September 7, 2025.
DIIs have increasingly played a stabilising role, with net inflows growing from modest levels in the early 2010s to record highs in recent years, driven by rising domestic savings channeled through mutual funds and retirement funds. Cumulative net DII investment from 2010 to September 2025 exceeds Rs 20 lakh crore.
| Year | DII Net Investment (Rs Crore) |
|---|---|
| 2010 | -18,632.06 |
| 2011 | 29,482.13 |
| 2012 | -55,800.09 |
| 2013 | -72,370.68 |
| 2014 | -29,648.30 |
| 2015 | 64,653.11 |
| 2016 | 40,080.69 |
| 2017 | 89,211.41 |
| 2018 | 96,645.92 |
| 2019 | 46,914.90 |
| 2020 | -46,040.77 |
| 2021 | 92,405.59 |
| 2022 | 274,737.25 |
| 2023 | 182,184.60 |
| 2024 | 503,381.22 |
| 2025 (up to Sep 7) | 362,390.72 |
Key Trends And Insights
(a) Early 2010s (2010–2014): DIIs were net sellers overall, with outflows peaking in 2013 at Rs 72,371 crore, as domestic funds focused on fixed income amid volatile equity markets.
(b) Mid-2010s Recovery (2015–2019): Inflows turned positive, averaging around Rs 67,000 crore annually, supported by economic growth and increasing SIP (Systematic Investment Plan) inflows into mutual funds.
(c) Pandemic and Post-Pandemic (2020–2022): A brief net outflow in 2020 due to redemptions during COVID-19, followed by strong recovery with Rs 2.75 lakh crore in 2022—the highest until then—amid retail investor surge.
(d) Recent Years (2023–2025): Record inflows, with 2024 marking the peak at Rs 5.03 lakh crore. In 2025 so far, DIIs have invested Rs 3.62 lakh crore, offsetting FII outflows and supporting market resilience despite global uncertainties.
(e) Cumulative Impact: DII holdings in Indian equities have risen from about 5–6% in 2010 to over 17% by mid-2025, surpassing FII holdings in some metrics.
Data sourced from aggregated trading activity reports. Negative values indicate net selling. For real-time updates, refer to NSE or BSE official reports.
Comparison Between FII And DII Activity In The Indian Stock Market (2020–2025)
FIIs and DIIs play contrasting roles in the Indian equity market. FIIs often drive volatility with their global fund flows, leading to net withdrawals (outflows) during uncertain periods, while DIIs, including mutual funds and insurance companies, provide stability through consistent investments, especially via SIPs. The table below shows yearly net investments in the equity (cash) segment in Rs crore (positive for net inflows/investments, negative for net outflows/withdrawals). Data for 2025 is provisional up to September 7, 2025. FII withdrawals are highlighted where net is negative, indicating selling pressure offset by DII buying.
| Year | FII Net (Rs Crore) | DII Net (Rs Crore) | Key Notes |
|---|---|---|---|
| 2020 | 172,849 | -46,041 | FII inflows supported market recovery post-COVID crash; DIIs saw minor net outflow amid redemptions. |
| 2021 | 25,768 | 92,406 | Modest FII inflows amid global recovery; DIIs ramped up buying. |
| 2022 | -121,500 | 274,737 | Significant FII withdrawals (Rs 1.22 lakh crore) due to rising US rates and Ukraine war; DIIs absorbed with record inflows. |
| 2023 | 174,963 | 182,185 | Strong FII inflows (Rs 1.75 lakh crore) on India’s growth story; DIIs continued steady support. |
| 2024 | 26,565 | 503,381 | Mild FII inflows despite mid-year volatility; DIIs hit all-time high inflows (Rs 5.03 lakh crore), surpassing FIIs. |
| 2025 (up to Sep 7) | -142,892 | 362,391 | Heavy FII withdrawals (Rs 1.43 lakh crore) amid global uncertainties and high valuations; DIIs invested Rs 3.62 lakh crore, stabilizing the market. |
Key Insights
(a) FII Withdrawals Impact: FIIs were net sellers in 2022 and 2025, withdrawing over Rs 2.64 lakh crore combined, often triggering corrections (e.g., Nifty fell ~12% in 2022). However, inflows in 2020 and 2023 (total ~Rs 3.47 lakh crore) fueled bull runs.
(b) DII Counterbalance: DIIs have been net buyers every year except 2020, with cumulative inflows exceeding Rs 13.7 lakh crore from 2020–2025. Their 2024 and 2025 activity (over Rs 8.65 lakh crore combined) highlights rising domestic participation, reducing reliance on FIIs.
(c) Overall Trend: DII holdings rose from ~12% in 2020 to >17% by mid-2025, overtaking FIIs in some metrics. This shift has made the market more resilient to FII outflows.
Data sourced from NSE/BSE trading reports, NSDL, and aggregated market analyses. Figures are approximate and subject to minor revisions; negatives for FII indicate withdrawals. For latest, check NSE India.
Conclusion
A DII-driven bubble in the Indian stock market is a genuine and serious concern, particularly in overheated segments like IPO, small- and mid-caps, etc where valuations outpace fundamentals. Risks include overvaluation, retail overexposure, and potential liquidity shocks. Investors should remain cautious, prioritise fundamentals, and avoid speculative bets to navigate potential volatility.
The fact that FIIs are net sellers in the last four out of five years and DIIs are net buyers in the last five years, cannot be ignored. There is a clear trend that is hinting towards a formation of a Risky DII Bubble says Praveen Dalal.