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The Indian stock market experienced a brief period of optimism on Tuesday, following a seven-day losing streak. The Sensex and Nifty indices saw initial gains exceeding 1%, with the Sensex climbing over 1000 points intraday. However, this relief rally proved short-lived, with most gains erased by the end of the trading session. The Sensex closed with a modest increase of 239.37 points, settling at 77,578.38, while the Nifty50 ended at 23,518.50. This volatility underscores the ongoing cautious sentiment among investors, fueled by several key factors: weak corporate earnings, persistent foreign institutional investor (FII) selling, and broader global economic concerns. The market's inability to sustain the initial surge highlights the fragility of the current market conditions and the underlying skepticism surrounding the long-term outlook.
One of the primary reasons for the rally's failure to hold was the prevalence of profit-booking. Market analysts observed that the initial surge was primarily driven by short-term buying, with investors capitalizing on the opportunity to secure profits after the recent downturn. This profit-taking significantly countered the positive momentum generated earlier in the day. Coupled with this, disappointing Q2 earnings reports from several companies dampened investor enthusiasm. Vinod Nair, Head of Research at Geojit Financial Services, emphasized the significant role of consistent FII selling and underwhelming earnings in curtailing the relief rally. He argued that while the recent valuation correction may temporarily pause further declines, a sustainable recovery hinges on improved earnings, potentially driven by increased central and state government expenditure in the latter half of the year. This points to a crucial dependency on macroeconomic factors for market stabilization.
Global economic headwinds further exacerbated the situation, contributing significantly to the market's inability to sustain the initial rally. A stronger US dollar, rising US Treasury yields, and relentless foreign outflows created a challenging external environment for Indian equities. FIIs have been net sellers for 35 consecutive trading sessions, withdrawing a substantial Rs 27,600 crore in the first half of November alone, following record outflows of Rs 1.14 lakh crore in October. These continuous outflows indicate a lack of confidence in the Indian market from international investors, adding pressure to already weakening domestic sentiment. Concerns regarding inflation and the delayed prospect of interest rate cuts by the Reserve Bank of India (RBI) further amplified the negative sentiment. Gaurav Garg of Lemonn Markets Desk highlighted that the latest inflation data has raised concerns about potential growth slowdown, pushing expectations for RBI rate cuts into early FY26. This combination of global uncertainties and domestic economic concerns created a double whammy effect, hindering any sustained upward momentum.
From a technical perspective, the market exhibited signs of underlying weakness. While sectors like banking and IT showed initial strength, driving Tuesday’s gains, a sharp sell-off in sectors such as metals and energy negated much of the early progress. Ajit Mishra, SVP of Research at Religare Broking, noted that the market remains firmly under bearish control, with each rebound being used as an opportunity for further selling. He advocated a ‘sell on rise’ strategy until a clear reversal signal emerges, indicating a persistent negative outlook. Although broader indices, including mid-cap and small-cap stocks, showed slightly better performance with gains of nearly 0.5%, the overall market sentiment remained subdued. This technical analysis reinforces the concerns raised by the fundamental analysis, suggesting a comprehensive bearish trend affecting various market segments.
The prevailing market correction is unlikely to end swiftly unless several key factors improve significantly. Experts concur that a sustained recovery requires a stabilization of foreign outflows, improved earnings reports, and reduced inflation concerns. Gaurav Garg described the current situation as a classic de-rating in valuation multiples as the market adjusts its earnings growth expectations. He believes that until there is clarity on rate cuts, earnings stabilization, and a halt in foreign selling, the market is likely to remain range-bound with a downward bias. Vishnu Kant Upadhyay of Master Capital Services added a technical perspective, suggesting that the short-covering rally observed was fragile, and that a decisive move above 24,000 on the Nifty index is needed to shift market sentiment towards optimism. VLA Ambala, Co-Founder of Stock Market Today (SMT), further emphasized a cautious approach, advising investors to adopt a ‘sell on rise’ strategy and for short-term investors to maintain hedged portfolios. The consensus view among experts suggests that a sustained recovery remains contingent upon a positive resolution of the current macroeconomic and global uncertainties.
Source: Explained: 3 reasons why Sensex, Nifty failed to sustain relief rally