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The Indian stock market is facing a significant correction, with the Nifty down 10% from its 52-week high and the Sensex losing over 8,000 points in less than two months. This correction is being driven by a number of factors, including the rising US bond yields, the continued sell-off by foreign institutional investors (FIIs), and concerns about the economic outlook. While the headline indices have not yet entered bear market territory, the broader market is already reflecting signs of a bear market, with over 900 stocks above Rs 1,000 crore market capitalization down at least 20% from their 52-week highs. This correction marks the first significant one in terms of both time and price since March 2023, signaling a shift in market sentiment.
The US 10-year bond yield has surged to 4.42%, making US investments more attractive to investors and leading to outflows from emerging markets like India. This is exacerbating the sell-off by FIIs, who have pulled out a record Rs 1.2 lakh crore from Dalal Street since October. The Q2 earnings season has further dampened sentiment, with the highest number of downgrades since early 2020. These downgrades indicate that companies are struggling to maintain their previous growth rates, and this has put pressure on valuations. Despite the challenging environment, domestic institutional investors remain optimistic about the India story, but the outflows from FIIs are proving to be a major headwind.
While the short-term outlook appears grim, analysts are hopeful that the market will stabilize in the coming quarters. Market insiders anticipate that Q3 will show some partial recovery, and Q4 could be notably stronger from an earnings perspective. This recovery is expected to be driven by increased infrastructure spending and fiscal stimulus. However, there may be further mild adjustments in Q3, and the market is likely to remain in a consolidation mode for a few more months. On the technical charts, the Nifty is currently trading near its 200-DMA and looks heavily oversold, suggesting a potential temporary bottom around the 23,500 level. However, the 24,500 level will likely serve as a key resistance. While there may be short-term volatility, especially in Q3, the market should begin to stabilize and gain momentum by the fourth quarter, provided that fiscal spending and growth prospects align as anticipated.
In conclusion, the Indian stock market is facing a significant correction, driven by a combination of global and domestic factors. While the short-term outlook is uncertain, the long-term prospects remain positive. Investors should exercise caution and consider their risk appetite while navigating this challenging market environment. The coming quarters will be crucial in determining the trajectory of the market, and investors should closely monitor the evolving economic landscape and corporate earnings.
Source: Nifty down 10% from peak, Sensex weaker by 8,000 points in less than 2 months. Bear market next?