The Great Indian Liquidity Tug of War: Mutual Fund Cash vs Promoter Exits & IPOs

Liquidity is the lifeblood of the stock market- when it's abundant, markets thrive; when it dries up, panic sets in. This blog explores how retail activity, mutual fund cash positions, promoter selling, block deals, and major IPOs all signal the current liquidity crunch in Indian equities. Through data, metaphors, and market insights, we understand why the “well” feels dry and what that means for the road ahead.

Markets and Liquidity

Think of the stock market as an ancient, massive well. The availability of money (liquidity) is the water in it. The important consideration to be made over here is that the markets  are green and good only till the water is adequate. As long as the well is thriving with water, valuations are great, the flow of trades is seamless and the investor’s confidence is at an all time high. 

The water does recede, eventually.

It floods upon the euphoria and the sentiments crash. Prices sink, volumes dry up, confidence bottoms out and suddenly the valuations do not seem alright. The fear realises, a sense of foreboding builds, and the once star-studded stock market, now seems to be another scheme. We then enter the bear phase.

Liquidity Simplified

For starters, liquidity can be defined as the ease with which an asset, or security, can be converted into ready cash without affecting its market price. In simple terms, the free flow of funds, the availability of cash is synonymous with liquidity.

We already tagged the stock market as a huge well and the water in it as liquidity. For the sake of simplified understanding, here are a few more metaphors:

1. Retail Investors: They are like the monsoon rain, steadily filling the well up with direct investments or through SIPs. The moment fear sets in, they withdraw their water.

Source: Xylem Investments Research

The above chart shows the gradual fall in trade activity of retail investors. In July’24 the activity peaked at  12,00,00,000 trades and then gradually kept on falling at Jun’25 all time low activity of 5,00,00,000 trades. Panic set in post the Sep’24 correction. Retailers abate market exposure in a corrective environment and this is evidently seen in the above BSE data. Lesser the frequency of rains, poorer the adequacy of liquidity.

Source: Xylem Investments Research

As we navigate through the data above, we realise the number of new SIP registrations month on month saw a dip. At a peak of 73,00,000 new registrations in July’24, this number eroded eventually down to mere 49,00,000 by Nov’24. By Jan’25 we see an increase in SIP cancellations as compared to new registers. The cancellations widened, peaking out at 162 in April’25. This worsens the rainfalls, therefore the liquidity.

2. Institutions and Mutual Funds: They are the massive reservoirs or dams. They invest on behalf of retail investors. They can flourish the well if they deploy cash and at the same time leave it barren by withdrawing. 

   

   
   

Source: Xylem Investments Research

This data from Apr’2025 makes it pretty clear that the phase we are in is a classic poor-liquidity one. Mutual Funds are holding back a big chunk of their AUM as cash. Typically in a one-way upward market, the cash positions tend to be close to nothing. As sentiments become fragile, these giants pull-back and sit on a pile of cash, waiting for the next upcycle.

3. (A) Promoter Selling: Think of them as the farmers. They sell massive stakes to fill their buckets. This causes over-supply of shares in the market. A retailer would question himself, “The promoter himself has sold a part. Is it a bad time to be invested?”.

   (B)Bulk & Block deals: These are a classic example of underground cracks and crevices in the well, far from the retailer's sight. Often missed, they move huge volumes of shares from institutions to institutions. Gradually, they empty the wells.

   

Source: Xylem Investments Research

These are the major block and bulk deals between July’24 and Sep’24. 

Source: Xylem Investments Research

These are the major block and bulk deals in the last 2 months.

Block deals are a critical indicator of liquidity stress and market sentiment. In Sep '24, the market was still buoyant with strong institutional participation and high risk appetite. Large promoter sales like GE T&D India’s 11.7% OFS were easily absorbed, reflecting a healthy system flush with liquidity. But fast forward to Jun’25, the landscape has shifted. In just two weeks, over ₹40,000 crore worth of promoter, PE, and VC selling has hit the market. High-profile exits like Bajaj Finserv’s ₹5,800 crore block deal, Dixon Technologies' ₹2,221 crore sale, and Suzlon Energy's promoter offload are examples where large supply tested the market’s capacity.

Unlike before, demand has thinned. Retail participation is stretched, and institutional flows are selective. As a result, block deals are now leading to price overhang and breakdowns, especially in mid- and small-cap names. When supply overwhelms demand, even fundamentally strong stocks correct not because of poor performance, but because the market cannot absorb the volume. 

Some of the recent block deals over the course of May and June are: 

Source: Xylem Investments Research

4. IPOs: Capital is scarce. A massive IPO of a country-favourite company diverts money to it. This erodes the liquidity further. It acts like a lucrative, quick money making opportunity and causes divergence. Think of them as an alternate opportunity to pool the water into. 

Source: Xylem Investments Research

Source: Xylem Investments Research

Massive IPOs like that of Zepto, SBI mutual fund, Phone Pe, Tata Capital,  LG Electric, NSDL, NSE, Cardekho, Meesho are all lined up, not sure when, but for sure will draw a lot of liquidity towards them.

For context, a chunky IPO like that of Hyundai back in October, or that of HDB coming up in July could suck massive liquidity. This means that 7.6% of the total cash (₹1,65,000 crore) held by the MF could be swept off, just by HDB’s IPO.

SOURCE: Xylem Investments Research

Final Note

To conclude, we are low on liquidity. Retailers are afraid to stay invested, block deals are in multitude, mutual funds and portfolio managers are on huge piles of cash. There is no emergence of a clear leading industry. We hear of a war and the defence stocks rally. As of 23rd June, post the ceasefire announcement, defence stocks tumbled. Somedays, it is railway, then real estate, then banks and then there are corrections. This is a major reason why we are where we were back in Sep '24. The well is drained of water. But this shall pass too. Indian markets have shown resilience and with mitigation of the global tensions & markets, the stock markets will be all set to grow, once again.

If you'd like to discuss your portfolio or explore how Xylem can help you navigate this market, consult with us here.