Nifty 50 at 25k: What is driving the market? Is it heading into risky territory?

The Nifty 50 is up over 14 per cent this year so far, a pretty significant gain for a benchmark index. However, the gains in the mid- and small-cap segments have been even stronger. The Nifty Midcap 150 index and the Nifty Smallcap 250 index have surged 27 per cent each this year so far.

Experts believe the market may see some correction in the near term, but the medium to long-term prospects remain healthy.

What is driving the Indian stock market?

Retail money is driving the market. The Indian stock market has seen a strong influx of retail investors in the last few years. Their bullish view about the Indian stock market has been the biggest reason behind the market's surge.

"The influx of new investors is driving the market. Even now, 8-10 lakh new investors are coming into the market every week. The number of investors registered with BSE has crossed 18.3 crore. In the last 12 months alone, 4.6 crore investors have joined the market," said G. Chokkalingam, the founder and head of research at Equinomics Research Private Ltd.

Indian economy's robust performance in the recent past and the expectations of its sustenance have underpinned the sentiment of retail investors.

"Markets going up is primarily a function of overall confidence in terms of the durability of growth rate. That is why we see multiples are at a premium compared to historical averages. This is likely to stay because, structurally, we do not have much of a challenge from an economic perspective unless something happens globally," said Pankaj Pandey, the head of research at ICICI Securities.

Prashanth Tapse, Senior VP (Research) at Mehta Equities, pointed out that despite valuation concerns in every sector, markets continue to outperform, mainly driven by capital inflow from retail directly, as well as via mutual funds and better-than-expected Q1 quarterly earnings.

"I would give credit to the rise of retail investor participation, pumping inflow of capital into the broader market through the SIP route, which is keeping markets hold and rising," said Tapse.

Vaibhav Shah, a fund manager at Torus Oro PMS, sees multiple factors at play that are driving the market to record highs.

"Globally, when most nations are struggling for growth, India is expected to be one of the fastest-growing economies. Secondly, strong DII flows have not only helped to lower volatility but have been a key catalyst to drive markets to new highs, showcasing the relentless strength of domestic liquidity. Third, with the capex announcements made over the last several years, the benefits will start coming in, which will help India transition into a new horizon of high and stable growth. Last, emerging market equities will be more attractive with the interest rate cycle peaking out," said Shah.

Is the Indian stock market heading into risky territory?

Valuations are high across segments. The recent rally has caused the market to overheat. Experts believe any negative surprise may trigger a sharp fall in the market.

According to Amit Goel, the co-founder and chief global strategist at Pace 360, the short-term outlook of the Indian stock market remains cautious as market participants grapple with high valuations and potential macroeconomic headwinds.

"We believe that the Indian markets are extremely overheated, with a few chosen sectors attracting the bulk of the investors' attention. The weakest hands in the Indian market are giving exit to the strongest hands at very premium valuations in these chosen sectors, significantly weakening their long-term profile," said Goel.

Goel believes retail investors' reaction to market volatility may trigger a correction.

"With holdings becoming more concentrated in retail hands, any attempt to even partially exit collectively could lead to a 10 per cent fall," said Goel.

"We expect the headline Indian indices to start correcting any time now. On a longer-term basis, Indian equities represent the biggest bubble ever, largely thanks to the domestic inflows, which are entirely blind to level and valuations. This phenomenon has no precedent in world history and will have catastrophic consequences for an entire generation of the Indian middle class, which is endlessly buying into a bubble of monstrous proportions," said Goel.

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