Domestic flows into MFs have accelerated through May after the market rebound: Emkay The financial services company reported that fund flows remained strong for the period, with domestic flows into mutual funds (MFs) accelerating through May after the market bounced back in April and when global risks receded.

The markets are to pause for breath after a frenetic, close to a 10 per cent Nifty rally since the tariff pause announcement in mid-April 2025, said Emkay Global Financial Services in its report titled India Strategy Weekly Idea Metrics.

The financial services company reported that fund flows remained strong for the period, with domestic flows into mutual funds (MFs) accelerating through May after the market bounced back in April and when global risks receded. Foreign Portfolio Investment (FPI) selling started to ease from March and also turned positive in May.

The markets could also see a renewed period of FPI selling with the resurgence of geopolitical risks, but Emkay said that it remains constructive over the matter for the medium term. Elevated emerging market flows are expected as the US economy slows down and India is poised to stand out due to a cyclical recovery in the second half of FY26.

"The elevated valuations also pose a near-term risk to FPI flows. We have seen no worrying signs from a supply perspective, IPOs and QIPs have remained muted (INR 110 billion in the last month), albeit they are showing early signs of a pick-up. There has been a sharp uptick in block deals (INR 40 billion in the last month). Promoter selling and pledging activity has been at comfortable levels," said the report.

On the valuation front, however, comfort has largely eroded due to the escalation of the Middle-East conflict that could trigger a sell-off.

"From a medium-term perspective, though, we are not worried. The crude price spike is likely to be transient, and India's fundamentals are otherwise looking up. We see an earnings recovery on the back of aggressive RBI easing and weak commodity prices," said Emkay.

The conflict between Israel and Iran also adds a new dimension to the larger conflict story in the Middle East region, representing a short-term risk to the markets. For India, the biggest worry will be a possible sharp spike in crude oil prices, which could affect the fiscal and inflation concerns, according to the report.

The report said," We believe this impact is transitory as the fundamentals for crude prices remain weak due to energy transition and slowing growth in western economies. Foreign flows may also be affected, though that too would be short-term."

Emkay said that its fundamental thesis on the Indian markets is unchanged as of now, but will be revisited if the crude oil prices remain elevated. Sectors that will be vulnerable to the crude oil spike will be oil marketing, autos, and staples, according to the report. Pharma API manufacturing and the chemical manufacturing sectors could also face pressures.