Indian stock market: Rise, fall, repeat... How to navigate this market volatility?

Following a rise of over 1 per cent, which ended a three-day losing streak, the Indian stock market benchmark Nifty 50 experienced a nearly 1 per cent drop during intraday trading on Thursday, August 8. The market trend reflects buying on dips and profit booking at higher levels, driven by heightened geopolitical tensions and concerns over US economic growth.

The diverging monetary policies of major global central banks are also contributing to market participants' nervousness. While the US Fed maintained a status quo on policy rates in July and signalled rate cuts could start in September, the Bank of Japan raised interest rates, triggering reverse Yen carry trade and causing a sharp selloff in stocks.

The Reserve Bank of India (RBI) on August 8 maintained a status quo on the repo rate for the ninth consecutive time. The central bank maintained its growth and inflation forecasts for the current financial year. Still, it highlighted that while core inflation has fallen significantly, rising food inflation remains a key concern. The central bank did not give any clear signs about rate cuts.

Some experts believe the RBI is unlikely to cut rates before the Federal Reserve does due to a still-elusive 4 per cent inflation target. If the Fed begins cutting rates in September, which seems likely, the RBI might consider a rate cut in October. Additionally, some experts predict the RBI may cut rates in Q4 FY25.

How to navigate the volatility in the Indian stock market?

Market volatility is high. The fear indicator India VIX has jumped 25 per cent in August so far.

There is a high chance that the Indian stock market will remain volatile this year, reacting to macroeconomic prints, global cues, central banks' actions and the news surrounding the US Presidential election.

However, the medium-to-long-term outlook of the domestic market remains bright due to the prospects of healthy macroeconomic growth, a strong influx of retail money, and a favourable policy environment. Experts say one should use market corrections to add quality stocks to one's portfolio.

"Going forward over the next six months, we see volatility continuing as quite a few macro events are there, such as the US elections, Fed cutting rates and the Israel-Iran conflict. One should make volatility their friend and take advantage of market corrections to enter," said Kunal Mehta, Associate Director at Equirus.

At the current elevated market level, Mehta believes one may consider keeping some cash around 10-15 per cent.

"One good thing that has happened for India, in particular, is that commodities have seen a good correction and we have seen very good rainfall. This should help rein in inflation in the coming months and give room to RBI for rate cuts in H2FY25," said Mehta.

Abhishek Jain, the head of research at Arihant Capital, also believes that volatility will likely continue for some more time, probably until November, especially with the upcoming US elections.

"Investors should book some profits at the current level and stay on the sidelines or choose large cap instruments. We also expect sectors like pharma and agri to outperform," said Jain.

Narinder Wadhwa, Managing Director & CEO of SKI Capital, said investors should diversify their investments and spread their investments across various asset classes (equities, bonds, commodities) to reduce risk in the current volatile market.

Additionally, Wadhwa said investors should invest in fundamentally strong companies with robust business models, healthy balance sheets, and consistent earnings with a long-term perspective.

"Volatility is often short-term. Maintaining a long-term investment perspective can help ride out market fluctuations. Consider staggered or systematic investment plans (SIPs) to mitigate the risk of market timing," said Wadhwa.

Wadhwa said holding some cash can provide flexibility to capitalise on buying opportunities during market dips. However, he cautioned that staying entirely on the sidelines might result in missed opportunities for gains.

"While holding cash can be a prudent short-term strategy, staying invested in the market with a diversified portfolio is generally advisable. Completely exiting the market can lead to missed opportunities when it rebounds. Balancing your portfolio to include both defensive stocks and growth opportunities while maintaining a portion in cash can offer a more resilient approach to market volatility. Individual strategies should be tailored to investor risk tolerance, investment horizon, and financial goals," Wadhwa said.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.