Vigorous FII selling may taper, paving way for short-term recovery

The Indian stock market has seen an accelerated week-on-week decline this month. The bearish trend, which began in the last week of September, has been ongoing for about a month. Interestingly, global equity markets have been experiencing high volatility since June-July, approximately 2-3 months earlier. This indicates that the domestic sell-off occurred with a delay. The current Indian market sell-off is a side effect of the sharp corrections borne by the other countries YTD. Many major global stock markets have already undergone and recovered from these corrections; India is now facing a delayed impact. Consequently, it is expected that the Indian market will also recover from this sell-off in due time.

However, the sustainability of the anticipated recovery remains uncertain in the short term due to ongoing economic slowdown concerns. In the medium term, the market is expected to trade in a range with a mixed bias. This week Nifty50 closed at 24,181, 2.7% below the last week and 7.76% below the closing of 26th Sept. Moving forward, the immediate support levels are 24,100 and 23,900, while resistance levels are at 24,300 and 24,500.

The global equity market is primarily challenged by economic slowdown, high inflation, and elevated interest rates. Bonds are becoming a more attractive investment due to their favourable yields. Additionally, gold is gaining appeal, driven by central bank demand, increasing geopolitical tensions, and the expectation of low future real yields for both equities, due to high valuations, and debt, due to high inflation.

The global sell-off was expedited when the ‘yen carry trade’ issue was triggered in July. At that time, India was unaffected and even outperformed, benefiting from the post-election rally, strong domestic economic data, and budget initiatives. The October fall of the domestic market is triggered by the delayed backfire of the global issues. Now, competition for India has intensified, particularly from China, which is becoming a prime investment destination for foreign investors due to its low valuations and economic stimulus measures. If the measures start to fructify the long-term story of China, the shift of FII funds from India to other EMs can further increase.

October Selloff

The domestic sell-off this month sped up as corporate earnings growth slowed down as per Q2 results. The recommended strategy for domestic investors is to buy on dips as India’s valuations are correcting to the long-term average, and the corporate outlook continues to remain strong. The RBI, in its recent policy, kept its 7.2% real GDP growth forecast for FY25. The market expects India to grow at a base rate of 6% to 8% this decade. We believe earnings growth will bounce back as global inflation and high interest rates ease in 2025. Sectors to watch include consumption, FMCG, infrastructure, new-generation companies, manufacturing, and chemicals.

The market is currently experiencing a correction phase due to subdued domestic earnings and the reallocation of FII funds to other EMs. This month, foreign institutional investors (FIIs) sold a record approximately ₹1 lakh crore worth of Indian shares, exceeding the highest inflows recorded during the COVID-19 pandemic in March 2020, which accounted for about 60% of this month's selling. Positively, DIIs have absorbed all the selling. And we can expect the FII selling to moderate in the near future. Though their timing of a strong reversal remains uncertain. If DIIs and retail inflow remain solid, the Nifty index is anticipated to find interim support, with strength levels of 23,900 and 23,500. The downside risk appears limited in the short term. The early phase of Samvat 2081 will be volatile due to moderated corporate earnings and the contraction of India's premium valuation. The long India rally will revert when the market anticipates a resurgence in earnings growth, with clarity expected in either Q3 or Q4 of FY25.

(The author is Head of Research, Geojit Financial Services)

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