SENSEX, NIFTY50 lose momentum in May despite strong FII and DII inflows and strong fundamentals; here's why

Indian equity markets have witnessed subdued performance in May, with benchmark indices struggling to sustain their April momentum despite strong macroeconomic fundamentals and institutional inflows. Market experts attribute the subdued performance to a surge in block deals that triggered a "sell-on-rise" sentiment among investors.

In May so far, the SENSEX has risen 1.33% and the NIFTY50 has managed a modest 1.72% gain — a marked slowdown compared to April, when the two indices rallied 3.65% and 3.5%, respectively.

The muted show in May comes despite massive investments from both Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs). FIIs pumped in ₹17,338.96 crore while DIIs bought shares worth ₹54,259.93 crore in May, bringing total institutional flows to over ₹71,000 crore, data from exchanges showed.

Fundamentals remain strong

What makes the market’s sluggishness surprising is the robust economic fundamentals as inflation is under control, supporting consumer demand and lowering input cost pressures. GST collections are at all-time highs, signalling buoyant economic activity, and a favourable monsoon forecast has lifted sentiment in the agricultural and rural economy, analysts said.

Meanwhile, expectations of a rate cut from the Reserve Bank of India (RBI) next month, which would typically lift market sentiment, are failing to boost the investor interest.

Further, geopolitical tensions between India and Pakistan have eased, and global trade worries have subsided, with no fresh tariff concerns on the horizon. Yet, none of these tailwinds have translated into a sustained market rally in May.

₹50,000 crore block deals dampening sentiment

A wave of block deals worth over ₹50,000 crore has overwhelmed the buying interest, analysts said. These large secondary market transactions, often initiated by promoters or private equity (PE) funds, have led to increased supply and market fatigue, analysts noted.

Three mega deals alone — involving ITC, Bharti Airtel, and IndiGo (InterGlobe Aviation) — accounted for ₹37,000 crore, or nearly 75% of the month's block deal volume.

On May 16, Singapore Telecommunications (Singtel) offloaded a 1.2% stake in Bharti Airtel worth ₹13,221 crore, trimming its holding to 28.3%.

British American Tobacco (BAT) exited a substantial chunk of its stake in ITC, raising ₹11,600 crore.

In a continuing phased exit, Rakesh Gangwal, co-founder of IndiGo, along with the Chinkerpoo Family Trust, sold a combined 3.4% stake worth over ₹6,800 crore.

These large stake sales by long-term investors, promoters and PE funds have triggered concerns about market saturation and profit-booking, especially as they coincide with broader bullish signals, said Kunal Harsh, a Delhi-based independent market analyst.

The sustained DII and FII buying in May suggests underlying confidence, and market watchers believe that if this strength continues into June, it could pave the way for a robust initial public offering (IPO) pipeline.

However, for that to happen, the "supply overhang" from promoter and PE exits will need to ease, and bullish sentiment must return to support higher valuations.

With intact fundamentals and ample liquidity, market participants remain cautiously optimistic. But the tug-of-war between strong buying interest and relentless block deal-driven supply will likely continue to dictate short-term market direction, said Harsh.

“If institutional inflows remain strong and the block deal wave subsides, June could prove to be a turnaround month, with fresh highs and IPO momentum returning to Dalal Street,” Harsh added.