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The Indian equity market experienced a significant downturn on Monday, with the Nifty and Sensex indices closing at seven-month lows, fueled by concerns over reduced US rate cuts and a strengthening US dollar. This decline wiped out over ₹12 trillion in investor wealth overnight. The broader market suffered even more severely, with mid-cap and small-cap indices plummeting by 4% each, also reaching seven-month lows. The Indian rupee also depreciated significantly, falling below the 86-mark against the dollar for the first time, marking its largest single-day drop in two years. This sharp devaluation added to the negative sentiment in the market.
The unexpectedly strong US jobs data fueled investor expectations of only one 25 basis point US rate cut in 2025, impacting global fund flows and making emerging markets like India less attractive for investment. This led to a rise in 10-year US Treasury yields to 14-month highs and strengthened the dollar. Foreign institutional investors (FIIs) net sold stocks worth ₹4,893 crore on Monday, while domestic institutional investors (DIIs) net bought ₹8,066 crore, highlighting a divergence in investor sentiment. Weak corporate earnings are also anticipated to further exacerbate the situation, with experts projecting earnings growth of only around 5% in the first half of 2025, impacting various sectors including auto, banks, and cement.
Market experts offered varied perspectives on the current situation and future outlook. Ashish Gupta, CIO of Axis Mutual Fund, described the market in 2025 as a story of two halves, with the first half being more challenging due to the earnings slowdown. He highlighted the attractiveness of valuations in certain sectors, particularly financials, but cautioned against a lack of supporting earnings growth. S. Naren, CIO of ICICI Prudential AMC, emphasized the overvaluation of mid-cap and small-cap stocks, advising investors to temper their return expectations. He noted that while the Nifty's price-to-earnings (P/E) ratio is below its five-year average, the Nifty Smallcap 250's P/E ratio is closely aligned with its five-year average, suggesting potential overvaluation in the smaller-cap segment.
Nitin Jain, chairman and MD of Neo Group, maintained a positive long-term view, believing the Indian market is in a 'mega bull run' that could last a decade. However, he predicted the Nifty to remain within a range of 21,000 to 25,000 this year. He advocated for diversification across high-quality companies across various market capitalizations, suggesting that mid- and small-caps might generate higher returns in the medium to long term, while large-caps offer better safety and steady returns. Gaurav Dua, head of capital market strategy at Mirae Asset Sharekhan, highlighted the increased risk-reward balance favoring large-cap stocks, suggesting that much of the price damage in large-caps may be over. He anticipates a continued correction in small and micro-caps, and favors export-oriented sectors like pharma, garments, and IT services due to rupee depreciation. He also suggested some exposure to precious metals like gold as a hedge against macro uncertainties and rupee depreciation.
The overall market sentiment reflects a climate of uncertainty, influenced by the anticipated policies of the US president-elect, the upcoming Union Budget 2025-26, and the potential for further foreign investment outflows. The strengthening dollar is identified as a key factor driving the current market volatility, with experts indicating that a stabilization of the dollar could trigger a market recovery. While the rupee has appreciated against most currencies besides the dollar, highlighting the dollar's strength as the core issue, the general consensus suggests that any further market correction could present buying opportunities for long-term investors. The divergence in investor sentiment, with DIIs buying and FIIs selling, further complicates the near-term outlook, necessitating a cautious and well-informed investment approach.
Source: Indian equities see bloodbath; small and midcaps take heavy hit