After a year of exuberance, markets bid adieu to FY24

The benchmark Nifty and Sensex indices rose 28% and 25%, respectively, during the year, their best gains in three years; However, the bigger stars were the smaller stocks -- the Nifty Midcap 100 and the Nifty Smallcap 250 which roared ahead 64% and 68%, an upsurge which has attracted the attention of regulators and market experts.

On Thursday, both Nifty and Sensex closed 0.9% higher at 22,326.90 and 73,651.35 respectively, after shedding much of the initial gains. The decline from higher levels indicates that some fund managers and derivatives traders may have booked profits.

Indian equities market will be shut on Friday on account of Good Friday.

According to Joseph Thomas, head of research at Emkay Wealth, Thursday's surge resulted from two reasons. First, the selling that has been going on for two or three weeks might have resulted in some short-covering. Second, moving into a long weekend could have prompted some buying. A short-covering occurs when investors holding bearish bets are compelled to buy back their shorts, speeding the rally further.

Shares of real estate, public sector banks, automobiles, energy and infrastructure companies gained sharply during the year, with their Nifty sectoral indices gaining 66-133%. Meanwhile, Nifty Media trailed with the lowest gains of 6%. However, the year's momentum was so strong that none of the sectors settled in the red.

Bloomberg data showed institutions reinforced this momentum, encouraged by India's economic outperformance as compared with other emerging markets. Foreign institutional investors (FIIs) ploughed a substantial ₹2.06 trillion into the Indian markets, closely followed by domestic institutional investors (DIIs) with ₹2.04 trillion.

Said Gaurang Shah, senior vice-president, Geojit Financial Services, “A short squeeze, NAV game (mutual funds rebalancing portfolios), truncated fiscal year-end week and the break of technical resistance at 22,200 drove Thursday's market rally". He expects the Nifty to trade volatile in a range of 21750-22526.60, until the results of the general election are announced.

On Wednesday, Morgan Stanley raised its India growth forecast for FY25 to 6.8%, highlighting India’s strength and stability as hallmarks of the current financial cycle.

Vetri Subramaniam, chief investment officer, UTI AMC, told Mint in a recent interview, “...in my experience of three decades, as far as market falls and rallies are concerned, you should expect one fall of 10% for Nifty every 12-18 months, and one fall of 20% in two-three years. This is the historical pattern. Once every eight to ten years, it falls 30-50%".

There are other notes of caution too — analysts at Nuvama Institutional Equities said, “FY24’s stars—SMIDs (smallcaps and midcaps), industrials and PSUs—are likely to face earnings/demand headwinds".

While Thursday's fluctuations could be primarily driven by fund managers rebalancing portfolios and traders closing out short positions, attention will soon shift to March quarter earnings, with a keen eye on input costs, said Souvik Saha, investment strategist at DSP Mutual Fund. Saha anticipates a pre-election rally, although he doesn't foresee a sharp one due to the recent upmove in Indian markets.

On Thursday, Indian stock markets crossed a miletone, with the phased implementation of T+0 settlements, where trades are settled on the same day they are executed. This means investors receive their securities or funds within hours rather than having to wait a day, as with the current T+1 cycle. The new system, rolled out as a pilot at a limited number of brokers, will cover 25 stocks, and is optional to begin with.

“On Monday, markets will react to global cues, as the US will announce Q4 GDP and core personal consumption expenditure data. Also, US Fed chair Powell’s speech, which is scheduled on Friday, will be important from an interest rate perspective," said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services.

The central bank's six-member Monetary Policy Committee (MPC) will meet on April 3-5, and is expected to maintain status quo on interest rates. With inflationary pressures persisting and food prices showing upward risks alongside strong economic growth prospects, the central bank may look at holding rates higher for longer to bring the inflation numbers closer to the targeted levels.

Next week, automobile stocks will be in the limelight as they release monthly sales data.

Some market experts see FY25 as a year marked by significant events such as elections in India and several developed economies, clarity on interest rates, and India's entry into global bond indices. India's positive GDP outlook, emphasis on manufacturing, and structural reforms seem to have made the country a preferred destination for foreign investment.

Shashank Pal, chief business officer, Prabhudas Lilladher Wealth Management, anticipates index gains in the range of 10-15% for FY25. He expects markets to be volatile in Q1, followed by a relatively calmer Q2. “Factors such as normal monsoon, RBI rate cuts in Q3, and policy continuity by the new government will influence market stability," he added.

“I expect status quo on repo rates with accommodative stance. However, they may tinker with MSF and LAF rates to balance liquidity. There is a possibility of widening of repo rate corridor — which is the difference between repo and reverse repo," added Pal.