Islands stocking dyestuff for Indian city (7)
I believe the answer is:
chennai
'indian city' is the definition.
(Chennai is a city in India)
'islands stocking dyestuff' is the wordplay.
'islands' becomes 'ci' (Channel Islands).
'stocking' means one lot of letters goes inside another ('stock' can mean 'carry' or 'contain').
'dyestuff' becomes 'henna' (henna is a kind of dyestuff).
'ci' going around 'henna' is 'CHENNAI'.
'for' is the link.
(Other definitions for chennai that I've seen before include "Indian city, formerly called Madras" , "Official name for Madras" , "City previously called Madras" , "Indian port" , "Current name for Madras" .)