Expert view: Indian stock market may remain range-bound this year

The Indian stock market has seen a sharp divergence between foreign portfolio investors (FPIs) and domestic institutional investors (DIIs) so far this year.

This year, FPIs have withdrawn nearly ₹2,59,115 crore from Indian equities till 10 July, as per NSDL data. Domestic investors, led by systematic investment plans (SIPs) have contributed almost ₹4.8 lakh crore, absorbing the FPI selling pressure.

The growing domestic participation has undoubtedly strengthened India's equity market.

However, experts underscore that it would be premature to assume that this support can completely offset foreign capital outflow.

"The retail base has not yet been tested through a prolonged and meaningful market drawdown. A market that has not broken is not necessarily one that cannot break. Domestic liquidity provides stability, but it should not be mistaken for a substitute for long-term global capital," Nikhil Chawla, Managing Partner and Co-Founder, xMultiplied Capital Advisors, observed.

"A potent combination of stretched global tech valuations and an unexpectedly hawkish Federal Reserve is creating a challenging stretch for Indian equities. If a recovery is to come, it will not be facilitated by external developments. It will have to be earned through stronger domestic fundamentals, better execution, and more attractive valuations," said Chawla.

Market to remain rangebound this year

Chawla believes the Indian stock market may remain range-bound this year as three important forces reshape the investment landscape: the global technology reset, India's near-term economic slowdown, and the long-term shift towards the country's physical economy.

The global technology reset

The rally in global technology stocks, which has been largely driven by optimism surrounding artificial intelligence (AI), seems to be ebbing as the macroeconomic environment becomes increasingly challenging.

The US Federal Reserve's decision to maintain a restrictive stance in view of persistent inflation has not only pushed up the cost of capital but also reduced the appeal of highly valued growth companies.

However, June's soft jobs report, just 57,000 new positions against expectations near 115,000, with the prior two months revised down, has taken a near-term rate hike largely off the table, without reopening the door to cuts.

As per Chawla, this is a higher-for-longer hold rather than an imminent tightening, which keeps capital costs elevated for exactly the companies priced most richly.

As investors reassess risk, sectors trading at premium multiples are likely to face the greatest valuation pressure.

India's near-term slowdown

Due to the Middle East conflict and crude oil volatility, the Indian economy could be entering a softer phase.

The Asian Development Bank (ADB) has cut India's economic growth forecast for the fiscal year 2027 (FY27). ADB lowered its GDP growth forecast for India to 6.6% from the 6.9% projected in April.

The recent energy shock from the Middle East conflict is still feeding through to input costs and inflation, even as crude prices are falling back toward pre-war levels on a reopening of the Strait of Hormuz and progress in US–Iran talks.

To add to it, an uneven monsoon threatens rural demand, and the estimated deficit in rainfall across key agricultural regions is set to hurt farm incomes and consumption.

The physical economy may drive the next investment cycle

There is widespread consensus on one thing: India's long-term investment opportunity lies increasingly in its physical economy.

While the Reserve Bank of India has already introduced several measures aimed at improving liquidity and supporting capital inflows, global investors may look forward to further simplification in taxes and regulatory reforms that improve ease of investing.

"India's structural opportunity lies in sectors that are building tangible productive capacity, such as public infrastructure, power generation, manufacturing, steel, cement, auto and auto components, logistics, pharmaceuticals, digital payments, and domestic tourism. These sectors stand to benefit from long-term policy support, rising domestic demand, and India's broader ambition to become a global manufacturing and supply-chain hub," said Chawla.

What can facilitate the return of foreign capital?

A slowdown in the US economy, political uncertainty, or a correction in expensive AI-related stocks may encourage global capital to diversify.

However, Chawla believes those developments are merely potential tailwinds.

"They are not the investment thesis. India's long-term appeal will depend on its own ability to deliver sustainable growth, improve execution, strengthen corporate earnings, and offer valuations that justify increased foreign participation," said Chawla.

Chawla said as valuations become more reasonable, the earnings cycle stabilises, and the country's physical economy continues to strengthen, India will once again command the attention of global investors.

"This will happen not because the rest of the world faltered, but because India earned its place as one of the most compelling long-term investment destinations," said Chawla.

Some experts believe that some degree of continued FPI outflow pressure is a reasonable risk to factor into one's outlook.

"Some degree of continued or even intensified FII outflow pressure is a reasonable risk to factor into one's outlook, particularly if global interest rates remain elevated for longer and global capital continues to gravitate towards AI-related opportunities outside India," Sandeep Neema, CIO and Director- Equities at PL Asset Management, told Mint.

"Periods of FII selling have historically created attractive entry points for patient, fundamentally driven capital. We would therefore advise against allowing FII flow data to be the primary determinant of portfolio decisions," Neema said.

Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.