Geopolitical Tensions and Primary Market Frenzy Curb Domestic Appetite: DII Equity Purchases Hit Lowest Pace in 16 Months

Geopolitical Tensions and Primary Market Frenzy Curb Domestic Appetite: DII Equity Purchases Hit Lowest Pace in 16 Months​

Domestic Institutional Investors (DIIs) are currently facing a cooling trend in the secondary market, registering the slowest pace of equity buying in approximately 16 months. This slowdown is being weighed down by robust primary market fundraising activity and heightened caution among fund managers amid global uncertainties.

As of July 23, DIIs purchased Indian equities worth around Rs 24,500 crore. This figure marks a notably slower pace compared to June, when DII purchases stood at nearly Rs 85,800 crore, and May's tally of Rs 82,669 crore.

Slowdown in Mutual Fund Flows and Institutional Activity​

Mutual funds registered the slowest purchasing activity since February 2026, contributing Rs 11,769 crore to equity purchases this month. While net inflows into active equity schemes have remained broadly stable, institutional buying remains constrained. Insurance and retirement fund data for July is still pending as these figures are released at the end of the month.

The cautionary trend is largely attributable to strong fundraising activity in the primary market. This month saw nine initial public offerings (IPOs) with a combined issue size of Rs 17,283 crore. Additionally, six qualified institutional placements (QIPs) raised Rs 20,800 crore.

Market Volatility and Global Headwinds​

A significant factor driving caution is the increased global volatility and geopolitical friction. Analysts point to renewed tensions between the US and Iran alongside crude oil prices rising near $100 a barrel.

The slower pace of DII buying has also coincided with four consecutive sessions where both the Sensex and Nifty closed lower. So far in July, both benchmark indices have declined 0.1 percent each. The BSE 150 MidCap index gained 0.3 percent, while the SmallCap 250 index fell 1.3 percent.

Expert View: Primary Market Activity vs. Secondary Purchase​

Nilesh Shah, Managing Director at Kotak Mahindra AMC, advised that monthly variations in DII activity should not be viewed in isolation. He noted that increased participation in primary issuances is impacting secondary market purchases. Institutional investors are expected to deploy capital based on the opportunities available across both markets, while reverse arbitrage activity remains a possibility.

Rajesh Palviya of Axis Securities explained that fund managers are currently awaiting management commentary on quarterly results before committing fresh capital and determining sector rotation, especially as global uncertainty persists. He added that midcap valuations have reached fair value following a sharp prior rally, contributing to the slowdown in purchases.

Disciplined Allocation and FII Sentiment Shifts​

Anonymously requested fund managers suggested that the moderation reflects disciplined capital allocation rather than weakening domestic conviction. This cautious stance is seen as prudent portfolio management ahead of the Q1FY27 earnings season and rising West Asia tensions. The market's near-term trajectory, however, will heavily depend on foreign institutional investor (FII) flows.

Derivatives data provides a stark picture of heightened risk-off sentiment among foreign investors. Foreign investors have completely restored net short positions after adding approximately 360,000 net short contracts across the last three sessions.

Future Sector Allocation and Opportunities​

Looking forward, private sector banks and financials are expected to remain preferred sectors due to their reasonable valuations. Allocations in capital goods, infrastructure, and defence are also likely to continue receiving strong support. This is backed by a healthy order pipeline and sustained government capital expenditure.