“Global funds are underweight India. So at some point they would increase their weight. Some increase in FII inflows is possible. However, it doesn’t matter from a market direction perspective. There is no correlation or causality.”The above observation from veteran investor Shankar Sharma challenges one of the most enduring assumptions on Dalal Street: that foreign institutional investors (FIIs) determine whether Indian equities rise or fall.For years, every trading session began with a tally of FII purchases and sales. Newspaper headlines routinely portrayed inflows as a vote of confidence in India and outflows as evidence of capital flight. Few billion dollars of buying was considered bullish while an equivalent amount of selling often sparked fears of a market correction.That framework no longer reflects the reality of India’s equity market.A recent strategy report by Motilal Oswal argues that the worst of the recent FII exodus may already be behind us. Four months of sustained selling have eased as Indian valuations have become more reasonable, geopolitical risks have moderated and corporate earnings are expected to improve. The brokerage also argues that India was less a victim of weak domestic fundamentals than of the global artificial intelligence investment frenzy, which funnelled capital into a narrow group of US technology companies. As that concentration trade broadens, India could once again attract a larger share of global portfolio allocations.That assessment is persuasive.But Sharma’s larger point is arguably more important. Even if foreign investors return, they are unlikely to dictate the direction of Indian equities as they once did.The biggest structural change in India’s capital marketsThe biggest structural change in India’s capital markets over the past five years has been the rise of domestic savings as the dominant source of equity capital. Systematic investment plans, insurance companies, pension funds and retail investors have created a pool of long-term liquidity that barely existed a decade ago. Whenever overseas investors have sold aggressively, domestic institutions have stepped in to absorb the supply, preventing the kind of prolonged market dislocations that once accompanied large FII withdrawals.Motilal Oswal’s data illustrates the transformation. Foreign ownership in the Nifty 500 has fallen to a record low, while domestic institutional ownership has climbed to an all-time high. Over the past 21 months, foreign investors have withdrawn roughly $60 billion from Indian equities. During the same period, domestic institutions invested nearly $162 billion – more than enough to offset the outflows and keep the broader market remarkably resilient.That marks a fundamental shift in market structure.FIIs are no longer the marginal buyers that determine whether Indian equities rise or fall. They remain influential participants, but they now operate in a market increasingly driven by domestic savings and corporate fundamentals rather than overseas liquidity.That does not make foreign capital irrelevant. FII flows continue to influence market sentiment, liquidity and, often, the pace of rallies. A sustained return of overseas investors could lift valuations and accelerate gains. But valuations alone do not sustain bull markets. Ultimately, earnings do.On that front, the outlook is becoming increasingly encouraging.Resilient domestic demandAccording to Crisil Intelligence, corporate India’s revenues are estimated to have grown 11-11.5% year-on-year in the June quarter, the fastest pace in eight quarters. The acceleration reflects resilient domestic demand, stronger automobile and white goods sales, and selective price increases across sectors.Profitability, however, is expected to come under temporary pressure. Crisil estimates operating margins could contract by 75-100 basis points as companies absorb much of the increase in fuel and logistics costs rather than passing them fully to consumers. While that may weigh on near-term earnings, it also signals that demand remains sufficiently resilient for companies to preserve volumes. As input costs stabilise, margins could recover.The breadth of the recovery is equally noteworthy. Passenger vehicle sales increased 25% during the quarter, commercial vehicle sales rose 15% and power generation expanded 9%. Pharmaceuticals, telecom and fast-moving consumer goods companies also recorded healthy revenue growth. Across industries, companies have begun implementing calibrated price increases to recover higher input costs without significantly denting demand.The technology sector, long viewed as a laggard, is also showing tentative signs of improvement. After a long gap, Tata Consultancy Services, India’s largest software exporter, added 9,000 new employees during the June quarter, while management commentary pointed to a gradual recovery in technology spending from the second quarter onwards. Although the sector is unlikely to rebound overnight, the commentary suggests that one of India’s largest export industries may be approaching an inflection point.Motilal Oswal’s medium-term outlook broadly reinforces that optimism. The brokerage expects corporate earnings to grow by around 15% annually between FY26 and FY28, supported by easing geopolitical tensions, softer energy prices and more attractive valuations. Importantly, it argues that even a moderation in FII selling – not necessarily a surge in foreign buying – could provide additional support because domestic liquidity remains exceptionally strong.Taken together, the Motilal Oswal and Crisil reports point to the same conclusion from different directions.One argues that foreign selling is likely to moderate as India becomes relatively more attractive within global portfolios. The other points to the strongest revenue growth in eight quarters despite temporary pressure on margins. Both suggest that the underlying fundamentals of corporate India are strengthening even before overseas investors return in any meaningful way.There is another factor that deserves equal attention: supply.India is entering one of its busiest Initial Public Offering (IPO) cycles. Companies are expected to raise close to $50 billion over the coming months through public offerings, including marquee listings such as Reliance Jio, PhonePe and Manipal Hospitals. Ordinarily, such a large pipeline would raise concerns about market liquidity and investors’ capacity to absorb new issuance.Despite the intermittent ceasefire between the US and Iran, this time appears different.Domestic institutional investors have repeatedly demonstrated their ability to absorb large equity supply. If FII selling merely moderates, rather than reverses sharply, that additional cushion could help sustain market liquidity. Rather than weighing on equities, a healthy IPO calendar could reinforce confidence by signalling that promoters believe market conditions are favourable for raising long-term capital.That is why the daily debate over FII inflows risks missing the bigger picture.Return of foreign investorsForeign investors will almost certainly return. Global funds that remain underweight India are unlikely to ignore one of the world’s fastest-growing major economies indefinitely.The foundations are already being laid. Motilal Oswal sees foreign selling easing and earnings strengthening. Crisil Intelligence projects the fastest revenue growth in eight quarters despite temporary margin compression. Domestic institutions continue to provide unprecedented liquidity, while one of the strongest IPO pipelines in recent years points to growing corporate confidence.The second half of calendar 2026 could therefore mark an important turning point for Indian equities – not because foreign money suddenly returns, but because the domestic earnings cycle is gathering momentum.India’s next bull market is likely to be powered less by overseas capital than by domestic savings, improving corporate profitability and expanding investment opportunities. Though Foreign investors and volatile geopolitics will still matter and may derail any optimism on recovery.Dev Chatterjee is a senior journalist and co-author of The Meltdown and India Inc’s Greatest Turnarounds.