Indo-Pak conflict: The Indian share market and the curious case of FII buying

After starting the week on a positive note, the Indian share market witnessed volatility and indecisive trading for the remaining part of the week amid escalated border tensions between India and Pakistan. The equity benchmarks, the BSE Sensex and the NSE Nifty50, registered a weekly loss of 1.5% each, snapping their three-week gaining streak.

The Sensex slipped below the crucial level of 80,000 and the Nifty ended near 24,000, as the domestic market came under pressure as geopolitical tensions intensified, while its neighbouring counterpart, the Pakistan stock market (Karachi Stock Exchange) crashed like a house of cards.

Stock trading in Pakistan was halted thrice during the week as the benchmark KSE-100 index witnessed free fall, ending in the red in four out of five sessions this week. The main stock market index in Pakistan has lost over 6% during the week, while it has fallen nearly 10% since the Pahalgam terror attack on April 22.

The Pakistani share market rattled under selling pressure this week after Indian armed forces launched a series of surgical strikes on terror infrastructure in Pakistan and Pakistan-occupied Kashmir (PoK) under Operation Sindoor. A total of nine terrorist camps were destroyed by the Indian armed forces in Pakistan and PoK.

On the other hand, the Indian share market showed resilience as the correction has been relatively contained given the magnitude of the geopolitical risks. Foreign fund inflows in Indian equities during this fragile and uncertain market conditions proved to be the icing on the cake for the domestic bourses.

Why are FIIs buying despite the escalating India-Pakistan conflict?

Despite a turbulent week where geopolitical anxieties dented retail investors’ sentiments, the Indian stock market managed to contain losses, driven by sustained fund inflows by foreign institutional investors (FIIs) as well as domestic institutional investors (DIIs). FIIs continued to bet on Indian equities, investing to the tune of ₹11,656 crore to date in May 2025, while DIIs net purchased equities worth ₹13,741 crore.

After being net buyers for 16 consecutive sessions, FIIs turned net sellers on May 9, paring equities worth ₹3,799 crore amid geopolitical worries. During the last 16 sessions, FIIs had net invested around ₹40,000 crore in Indian equities, attributed to factors like a strong economic outlook and a potentially weaker U.S. dollar. In a similar trend, DIIs sold their holdings worth ₹7,278 crore on Friday, dragging down the Sensex by 880 points to 79,454, and the Nifty by 266 points to 24,008.

FPI flows to date in May were positive for all key emerging markets (except Indonesia), said Shrikant Chouhan, Head Equity Research, Kotak Securities. India, Brazil, Malaysia, the Philippines, South Korea, Taiwan, Thailand, and Vietnam witnessed inflows of $1,371 million, $360 million, $148 million, $35 million, $361 million, $3,343 million, $32 million, and $52 million, respectively.

Going ahead, FPI flows are expected to remain volatile, he said, citing an increase in geopolitical risks.

What lies ahead for market?

Looking ahead, elevated geopolitical risks are expected to inject further volatility in the market, as reflected in the surge in the volatility index, India VIX, which crossed the 21 mark on Friday. “Investors are advised to adopt a stock-specific approach and refrain from taking aggressive positions until there is more clarity. A hedged strategy is recommended to manage near-term risks, while close monitoring of geopolitical developments will be crucial in shaping the market's next move," said Ajit Mishra, SVP, Research, Religare Broking Ltd.

Siddhartha Khemka, Head - Research, Wealth Management, Motilal Oswal Financial Services, said investors will continue to focus on the ongoing Q4 earnings season, with major companies like Tata Steel, Tata Motors, Bharti Airtel, and Hindustan Aeronautics scheduled to announce results. Additionally, key macroeconomic indicators such as India’s Consumer Price Index (CPI) and US industrial production data will be closely tracked for insights into the global economic outlook.

Technically, the sharp rally in Nifty from the April lows of 21,700 has now lost momentum, with the index slipping towards the key moving averages like the 20DEMA and the 200DSMA. “The previous breakout level around 23,800 now becomes a key support. A breach of this level could trigger further downside, with the next major support zone seen between 23,600 and 23,500, a confluence of the 50DEMA, 89DEMA, and the 38.2% Fibonacci retracement of the recent upmove. On the upside, immediate resistance lies between 24,250 and 24,300,” said Rajesh Bhosale, Equity Technical Analyst, Angel One.

Given the ongoing uncertainty, volatility is expected to remain elevated. Hence, traders are advised to focus on intraday opportunities and avoid aggressive overnight positions, he said.

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