Liquidity Wars: Who’s Powering the Market?

Today’s Market Update

The markets are waiting for the Fed’s move, and we will come to know about it tomorrow. The market seems to be taking it calmly, assuming there will be no adverse news.

Looking at the markets today, it was a clean bar with the low of the day being the same as the open of the day. Such candles usually mean that level becomes strong support. In past instances, when the open and low were the same, the markets moved up sharply.

• Today also, we crossed an important pivot of 25,150. The Nifty closed 0.68% higher, which is a nice rise.

• Nifty Junior went up 0.58%, Midcaps rose 0.62%, Small caps gained 0.74%, and Banks added 0.47%.

• Midcaps also gained 0.42% and small caps were up 0.64%. Small caps cleared previous resistance too, and although it would be good to see a few more sessions or even a weekly close above that level, they are looking strong for now.

• Gold also gained another 0.48%. In dollar terms, it is very close to $3,700 at $3,699 as of now. The converted price in India is around ₹11,096 per gram, but due to a premium of ₹4,000 per 10 grams in the market, buyers actually pay around ₹11,500. That’s quite high given that prices were just ₹9,800 less than a month back.

Other Market Triggers

• Bharti Airtel, L&T, Mahindra, Maruti, Kotak Bank, and Axis Bank all did well.

• Among IT names, TCS, Wipro, Tech Mahindra, and Infosys were in focus. Infosys has been spending ₹18,000 crore on buybacks, but the stock is not showing much strength.

• In the Nifty Next 50, Swiggy, Hyundai, JSW Energy, Motherson, Vedanta, Bajaj Holdings, Chola Finance, and Tata Power moved up strongly.

• On the losing side, VBL, Adani Power, Godrej Consumer, Dabur, and Naukri fell.

• The biggest mover of the day was Redington, which jumped 20% suddenly, catching everyone by surprise. This looks like it came on some unexpected news.

What to watch next ?

• Interest rate cuts don’t really gel well with markets going up in the short to medium term. Of course, in the long term, markets take their own course. But in the short run, the trigger at which the rates get cut matters.

• For example, if the expected rate cut is 0.25% and the Fed actually cuts by 0.5%, the American markets may fall because that would signal a desperate situation. On the other hand, precious metals and emerging markets may get a pop-up since more funds could move there instead of the U.S.

• So, these short-term plays are possible, but overall, reducing interest rates do not give a very positive impact on markets.

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What To Read This Week ?

Liquidity Wars: The Domestic vs. Foreign Flows Showdown

The Great Liquidity Divide 💱

Over the past few years, a striking trend has emerged: a strong divergence in investment behavior between Foreign Institutional Investors (FIIs) and domestic players. The data from 2024 and 2025 highlights this perfectly. While FIIs have been net sellers, particularly in 2025, domestic liquidity has surged, acting as a crucial counter-force.

In 2024, FIIs pulled out nearly $1 billion, and this trend accelerated dramatically in 2025, with an outflow of a staggering $15 billion in just nine months. This mirrors the behavior seen in 2022, when FIIs exited with $17 billion as valuations were perceived as too high after the post-COVID rally.

FIIs: The Valuation-Conscious Players 🧐

FIIs are proving to be highly sensitive to market valuations. Their investment strategy appears to be a valuation game. They pull out when they see valuations as inflated and re-enter when corrections make the market more attractive.

For instance, after a period of correction and sideways movement, they were net buyers in 2023 when valuations became more reasonable. Their significant exits in 2022 and 2025 clearly indicate a belief that the market was overvalued at those points.

Domestic Flows: A Blind Gush? 🌊

In stark contrast, domestic liquidity has shown an "enormous gush". This flow is primarily driven by three sources: mutual funds, insurance companies, and banks/financial institutions. A key driver behind this is the relentless inflow of money into mutual funds. The narrator points out that mutual fund managers have a structural incentive to deploy this capital, as they are "AUM gathering machines" who earn fees based on their Assets Under Management (AUM). This can lead to a situation where they continue to deploy money even when valuations are high, potentially leading to lower returns for investors in the future. The data suggests that domestic investors may be "blindly sipping away" or investing without a strong sensitivity to current market valuations, unlike their foreign counterparts.

The Silver Lining: A Potential Rocket Boost 🚀

Despite the current FII exits, there is a significant upside. The market's "silver lining" lies in the potential for a powerful twin-engine liquidity flow. Historically, every major FII down-cycle has been followed by a big up-cycle. If and when FIIs decide to reverse course and re-enter the market, and the current domestic gush continues, the combined force of these two liquidity sources could create a massive upward momentum—a "big rocket in the market." Investors are advised to wait for this potential alignment to realize a significant upward move.

Key Takeaways

Diverging Investment Behavior: There's a clear split in strategy, with FIIs acting as valuation-sensitive sellers while domestic players are net buyers, seemingly less concerned with current valuations.

Structural Incentives of MFs: Mutual funds are driven by the need to grow their AUM, which can lead to continued investment even in a high-valuation environment.

Potential for a Twin-Engine Rally: The combination of continued domestic inflows and a future return of FII money could fuel a massive market rally.

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