Ashokamithran T.

India’s key benchmark indices just had their worst week since June 2022, with the S&P BSE Sensex and NSE Nifty dropping almost 5% over five successive days of trading in the red. Both the benchmarks closed at a 21-day low last Friday, undoing a tentative recovery over the previous fortnight from five-month nadirs attained in late November.

To be clear, India was not the only major market to be hit in the past week, particularly after the U.S. Federal Reserve announced a 0.25% cut in interest rates but accompanied it with a rather hawkish guidance on the outlook for further rate reductions in 2025.

As Shrikant Chouhan, head of equity research at Kotak Securities pointed out, global equity markets witnessed various degrees of sell-off through the week with Brazil’s markets down 10%, Japan down 5% and even the S&P-500 index in the U.S. sinking 4%, in light of the U.S. monetary policy makers’ caution on the pace of future interest rate cuts.

Foreign Portfolio Investors (FPIs), who had exited Dalal Street in hordes over October and November, breaking four months of positive net inflows, have so far been net buyers in December, but this may yet change in the rest of the trading days this month after the Federal Reserve’s remarks. To put the numbers in context, FPIs’ net outflows were over a whopping ₹94,000 crore in October, followed by another ₹21,600 crore-odd in November.

Multiple factors were said to be at work, including Indian corporates’ underwhelming performance in the July-September quarter (Q2 of 2024-25) that was also subsequently confirmed in official GDP growth numbers that slipped to a seven-quarter low of 5.4% compared to the Reserve Bank of India’s projection of 7%. China’s stimulus packages and the incoming U.S. President Donald Trump’s remarks on tariff measures against countries like India also dented sentiment.

December has seen net inflows that are a little over November’s exit numbers so far, but those are still well below this year’s high figure of ₹57,724 crore net inflows in September that had lifted the Sensex and Nifty to their all-time peaks.

There is an urban legend on Dalal Street that investment managers at FPIs, who generally follow the calendar year unlike India’s April-March financial year format, tend to square up positions through December as they gear up for their Christmas vacation. And by January, things tend swing back to the positive territory. Whether this held true in recent years or not (it didn’t in January 2024, for instance), the likelihood of FPIs doing a January prop-up for Dalal Street is slim for the coming year, even as the Trump administration’s effect remains an imponderable factor.

In fact, some believe a major FPI fillip is unlikely till the April-June quarter, or Q1 of 2025-26, provided India Inc. delivers some improved results. HDFC Securities noted that U.S. equities were receiving disproportionately large amount of inflows with an inflow of $109 billion so far this year as opposed to $233 billion for the rest of the world.

“We believe that the U.S markets will continue to attract more flows and the Indian markets will become more attractive when we start to show better earnings in 2025-26... That’s when we will see more participation coming in from the FPIs,” remarked Dheeraj Relli, managing director and chief executive offer of HDFC Securities, while discussing Indian equities’ outlook for 2025 last week.

Hopes of a quick interest rate cut from the RBI also hinge on the growth-inflation balance being restored soon, so the markets may remain edgy for a while to come. Retail investors must tread with care and temper expectations of a calendar change boost. Merry Christmas!

Published on December 23, 2024