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The Indian stock market witnessed a sixth consecutive day of decline, driven by heavy selling pressure from foreign portfolio investors (FPIs). Despite domestic institutional investors (DIIs) injecting a record high of Rs 13,245.12 crore, the benchmark indices fell by almost 1%, indicating a broader shift in investor sentiment. Market experts suggest that retail and high net worth individuals may also have started booking profits, contributing to the downward trend.
Multiple factors are contributing to this bearish sentiment, including a shift in fund flows towards China, concerns about high valuations in India, geopolitical risks, and potential slowing earnings and economic growth momentum. China's aggressive stimulus measures have captivated global investors, leading to a reallocation of funds away from India. Global brokerage firm CLSA, for instance, has reportedly increased its weight on China while reducing its overweight exposure to India, projecting that India will underperform China equities for the remainder of 2024.
Adding to the negative sentiment are concerns about India's valuations. While robust domestic macroeconomic and earnings growth have previously provided support to equities, investors are now expressing worries about a potential slowdown. Brokerage firms such as Nuvama Institutional Equities and Motilal Oswal Financial Services anticipate that the earnings of Nifty companies will grow by just 2% year-on-year in the July-September quarter, marking the second consecutive quarter of slower growth. This could lead to downgrades in price-to-earnings multiples, further impacting the market.
Further dampening the outlook are geopolitical risks and the uncertainty surrounding the future trajectory of interest rate cuts. The recent strong job report in the US has led to speculation that the Federal Reserve may not be as aggressive with rate cuts as previously expected. This, coupled with the ongoing conflict in Israel and Iran, has added to the overall risk aversion in the market.
The combination of these factors has significantly impacted investor wealth. The Sensex and Nifty have dropped nearly 6% from their lifetime high levels, while investor wealth has fallen by nearly Rs 26 lakh crore from record highs to approximately $5.28 trillion. The broader market, particularly small-cap and mid-cap stocks, has been hit even harder due to valuation concerns. The BSE Smallcap index tumbled by 3.3%, while the BSE Midcap index closed 1.9% lower.
Source: China, valuation woes keep Indian equities under pressure