How Do Institutional Investors Act During Times of Conflict?

Decoding FII & DII Behavior Amid Geopolitical Uncertainty

When geopolitical tensions arise—be it full-scale war, border skirmishes, or diplomatic standoffs—their first shockwaves often hit the capital markets. One of the most telling indicators of market sentiment during such times is the behavior of Institutional Investors—both Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs). Understanding their trading behavior during periods of conflict can provide critical insight into market direction, risk sentiment, and capital flow dynamics.

This blog takes a deep-dive into how institutional investors navigate conflict-driven volatility, with data-backed trends, observed patterns, and key takeaways for retail investors.

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Institutional Capital: The Market's Smartest Money?

Institutional investors control large pools of capital, often deployed through sophisticated models that account for risk, volatility, macroeconomic indicators, and geopolitical threats. Their behavior is often pre-emptive rather than reactive—making them critical trendsetters during crises.

Two major categories exist:

• FIIs (Foreign Institutional Investors): These include hedge funds, pension funds, sovereign wealth funds, etc., operating cross-border and sensitive to global risk-off events.
• DIIs (Domestic Institutional Investors): These include mutual funds, insurance companies, and pension managers based in India.

Historical Trends: What the Data Tells Us

1. Kargil War (May–July 1999)

FII Behavior:

Initial outflows were seen in early May 1999 as border tensions escalated. However, FIIs returned strongly by July as India’s strategic advantage became apparent.

DII Behavior:

DIIs remained relatively steady, with some net buying recorded during the conflict phase, suggesting local confidence in institutional stability.

Takeaway: FIIs exited early due to uncertainty, but quickly reversed as geopolitical risks became “priced in.”

2. Demonetisation (Nov 2016)

FII Behavior:

FIIs pulled out close to ₹20,000 crore in Nov–Dec 2016 citing policy uncertainty and liquidity risks.

DII Behavior:

DIIs aggressively bought the dips, with ₹18,000+ crore net buying—mitigating downside and signaling faith in long-term reforms.

Takeaway: FIIs may react sharply to domestic shocks, while DIIs often act as a counterbalance.

3. India-China Border Tensions (2020)

FII Behavior:

Despite the Ladakh standoff, FIIs remained net buyers, attracted by India’s relative COVID recovery and central bank liquidity.

DII Behavior:

Moderate accumulation continued, with allocation into pharma, defense, and infrastructure plays.

Takeaway: Not all conflicts trigger outflows; other macro factors can outweigh regional tensions.

4. Russia-Ukraine War Impact on India (Feb–Mar 2022)

FII Behavior:

FIIs turned net sellers (~₹50,000 crore outflow over two months), reflecting global risk-off sentiment, not India-specific worries.

DII Behavior:

Strong domestic SIP flows enabled DIIs to purchase stocks aggressively—particularly in IT, banks, and auto sectors.

Takeaway: Global conflict prompts indiscriminate outflows, but DIIs offer market resilience.

DII vs FII: Understanding the Divergence

The divergence stems from their mandates and risk sensitivity:

• FIIs are macro-sensitive and pull out at the first sign of global risk.
• DIIs are valuation-sensitive and often accumulate when prices dip due to panic selling.
• What These Actions Reveal About Confidence

FIIs

• Risk-Off First Movers: Their exit often signals global nervousness—not always India-specific.
• Opportunistic returners: FIIs re-enter rapidly once the perceived worst is over.
• Currency-Sensitive: A falling rupee often accelerates exits.

DIIs

• Domestic Believers: They focus on long-term reform impact and corporate earnings.
• Stabilising Force: Mutual funds and insurance investments provide steady buying.
• Defensive Allocators: Rotate into FMCG, pharma, and large-cap banks during conflicts.

How Retail Investors Can Observe FII/DII Activity (Non-Advisory)

Retail investors don't need Bloomberg terminals to monitor institutional flows. Here’s how to track sentiment and position smartly:

NSE/BSE Data

• Visit the NSE India website → “FII/DII Activity” section for daily cash market trends.
• Read net buy/sell data in ₹ crore. Multiple days of FII selling may indicate a trend shift.

CDSL/NSDL Holding Data

• Check changes in institutional holdings of top companies every quarter.
• Steady DII accumulation often precedes long-term stock rallies.

Financial News Portals

• Sites like Moneycontrol, Economic Times, and Mint offer summaries of daily institutional activity.

Mutual Fund Factsheets

• Fund portfolios updated monthly can show which sectors DIIs are increasing exposure to.

Strategic Retail Observations (Not Advice)

• When FIIs Sell but DIIs Buy, it indicates strong domestic confidence—often a bottoming-out phase.
• Sector rotation by DIIs (e.g., shifting from IT to pharma) can reveal where institutional conviction is moving.
• Persistent FII inflows during conflict (like the 2020 Indo-China standoff) are signals that the broader macro outlook remains bullish.

What to Expect During an Indo-Pak Style Conflict

In a minor or localised Indo-Pak flare-up:

• FIIs may reduce exposure, especially in small/midcaps or sectors sensitive to rupee volatility (like autos and oil).
• DIIs will likely hold steady, continuing to allocate into large-cap defensive plays.
• Defense, energy, and infrastructure stocks could see temporary accumulation based on sentiment or expected capex.
• In such cases, institutional behavior becomes a sentiment barometer for broader market participants.

Conclusion: Learning from the Smart Money

Institutional investors—FIIs and DIIs—serve as real-time thermometers of market sentiment during geopolitical crises. While FIIs are nimble and globally exposed, DIIs offer a stabilising force rooted in India's long-term growth story.

For retail investors, observing institutional flows—not copying them blindly—offers vital clues. Understanding who is buying the dip and why helps distinguish between a temporary panic and a deeper trend.

Markets don’t just move on fear—they pivot on informed capital. And during conflict, that capital leaves footprints retail investors would be wise to track.