Markets
Mint Primer | Stormy Monday: What to expect, going ahead
Summary
- Indian equities started the week in a sea of red with investors turning poorer by more than ₹12 trillion overnight on Monday.
A whirlwind of worries hit the equity market this week, leading to a massive sell-off on Monday. Investors are now coursing through volatile sessions every day with only one question in mind: Is there any respite ahead? Mint explains why there might not be any.
What happened in markets this week?
Indian equities started the week in a sea of red with investors turning poorer by more than ₹12 trillion overnight on Monday. Fears of fewer US rate cuts and a raging dollar drained foreign liquidity from the system and dragged markets down. In the first three days of this week, foreign institutional investors (FIIs) net sold almost ₹16,600 crore of equities, more than what they sold in the entire last week. While a mid-week rally in US markets led by robust bank earnings and improving macroeconomic conditions offered some respite to domestic investors, it is expected to be short-lived.
Why did the Indian markets fall?
This was part of a global story. Global markets have been reeling under the pressure of a strengthening dollar, particularly after the victory of Donald Trump. Since its October-low the dollar index has risen 9% to 109, as investors bet on a stronger US economy and sustained inflationary pressures once Trump takes office as president. Rising US Treasury yields on expectations of lower interest rate cuts in 2025 have also turned riskier assets like emerging market equities unattractive for foreign investors. All these led to a double drain of liquidity from the system, causing domestic stocks to bleed out.
Why are US rate cut hopes moderating?
Robust GDP growth and a resilient labour market have led to lower unemployment and higher inflation expectations in the US. This weakens the case for faster and deeper rate cuts in the world’s largest economy. Though the December print for US core inflation was below expectations, few traders expect a 25-basis point rate cut in the 29 January Fed meeting.
Read more: Rupee tantrums: The risk and cost of RBI's approach
Is there any support at home?
Investors are not getting comfort from domestic fundamentals. Lower government spending, moderating household credit, sticky inflation and slow urban consumption have hit corporate earnings for the better part of FY25. Earnings per share downgrades have accelerated over the last six months as profit margin tailwinds continue to taper for India Inc. This has made it hard for Indian equities to justify their lofty valuations. Valuations of domestic stocks could look more like their emerging market peers.
Is there any respite for investors?
Most likely not. The risk appetite of domestic players is still tied to foreign inflows, says Nuvama Institutional Equities. India is a current account-deficit country and needs foreign institutional investments to fund its deficits and secure macro-stability. FII flows spur risk appetite, the brokerage said. It expects the ongoing FII selling to stall the performance of Indian equities especially in cyclical, small and mid-cap segments. Robust corporate earnings may be the only saving grace for India Inc., going ahead.
Read more: RBI to continue interventions in forex market, despite tight liquidity
