Indian Stock Market: Foreign portfolio investors (FPIs) are reluctant to pause their selling streak in Indian markets, even after withdrawing substantial funds in the previous calendar year. According to NSDL data, FPIs have already pulled out another ₹22,259 crore from Indian equities through exchanges so far this month.
The substantial selling pressure is weighing heavily on the markets, with both the Nifty 50 and Sensex down nearly 2% this month so far, and mid and small-cap stocks experiencing even more pain as the Nifty Midcap 100 and Nifty Smallcap 100 indices are both down by up to 8% in January.
Apart from equities, the outflow of funds from Indian markets is also impacting the domestic currency, which has been on a downward trend in recent months. Today marked another fresh low for the Indian rupee, which touched 86.42 against the US Dollar.
Several concerns are affecting FPIs sentiment, both from domestic and global factors, making them cautious about emerging markets.
Shrikant Chouhan, Head Equity Research, Kotak Securities said, "Nifty has been under pressure and underperformed most global markets. FPI flows to date in Jan’25 were negative for all key emerging markets (except S.Korea). India, Brazil, Indonesia, Malaysia, Philippines, Taiwan, Thailand, and Vietnam, witnessed outflows of US$1144 million, US$426 million, US$169 million, US$119 million, US$24 million, US$92 million, US$31 million, and US$69 million, respectively. S.Korea witnessed inflows of US$851 million."
A key concern, as per the market experts, is the steady rise in the US dollar, driven by expectations that the US Federal Reserve might slow down its rate cuts in 2025 or announce only one reduction this year. This has bolstered demand for the world's reserve currency.
Over the past three months, the US dollar index has strengthened by over 10% and is currently trading above 109, its highest level since November 2022.
Other factors weighing on investor sentiment include rising crude oil prices, subdued expectations for Indian Inc.'s Q3 performance, a slowdown in the Indian economy, uncertainties surrounding Donald Trump's economic policies, and the ongoing tensions between Russia and Ukraine.
The latest batch of US economic data, released on Friday, points to continued strong growth in the world's largest economy. According to the latest reports, the US added 256K jobs in December 2024, the most in nine months, following a downwardly revised 212K in November, once again beating market forecasts of 160K.
The unemployment rate edged down to 4.1%, compared with expectations of 4.2%, capping another year of resilience in the labour market. The data supported the view that US rates may remain unchanged for the foreseeable future, a possibility suggested by several Fed officials over the past week.
Following Friday’s jobs data, economists at some major banks revised their forecasts for additional Fed rate cuts.
Bank of America Corp., which previously anticipated two quarter-point reductions this year, no longer expects any and warned of a potential rate hike instead. Citigroup Inc., whose rate-cut outlook is among Wall Street’s most optimistic, still predicts five quarter-point cuts but now expects them to begin in May.
Goldman Sachs Group Inc. now expects two rate cuts this year instead of three, recent media reports showed.
Investors are now shifting focus to US inflation figures due later this week, with the consumer price index report scheduled for release on Wednesday. They’ll also be watching the New York Fed’s one-year inflation expectations due today, producer prices on Tuesday, and jobless claims on Thursday.
On the other hand, concerns surrounding Donald Trump's economic policies aimed at making American businesses more competitive on a global scale have raised fears of a potential global trade war. His reinforcement of tariff plans, particularly targeting China, has heightened worries about a possible spike in inflation.
The US on Friday imposed sanctions on Russia, targeting its energy sector, to help Ukraine maintain its independence and fight against Moscow, which led to a strong rally in crude oil prices. Both Brent and WTI crude futures touch 3-month high in the previous trading session.
Crude prices have also been buoyed in recent weeks by winter energy demand, declining US inventories, and speculation regarding the policies under the incoming administration of President-elect Donald Trump.
Apart from global concerns, there is growing worry that Q3FY25 could be another quarter of modest performance for Indian Inc. The market had expected a strong recovery from corporate India in Q3, but recent business updates from companies have shown only moderate growth. This has raised fears that EPS downgrades and cuts in target multiples could continue
Weaker-than-expected numbers in the September quarter dragged the markets during the last quarter of CY2024, and elevated valuations further damaged investor sentiment. A majority of analysts believe this trend could continue in January, as they expect modest performance from corporate India in the December quarter.
Nuvama Institutional Equities forecasts Nifty 50 earnings to grow 2% YoY in Q3FY25 as compared to a growth of 4% in H1FY25. The brokerage highlights that the combination of slowing earnings amid record-high valuations and tightening liquidity warrants caution. It advises that investors will need to brace for volatility in 2025.
Dr V K Vijayakumar, Chief Investment Strategist, at Geojit Financial Services, said, “FIIs intensified their selling spree in January. They have been sellers on all days except January 2nd. In the recent days, selling has intensified. The single major reason for the relentless selling by the FIIs is the steady rise in the dollar index, which is above 109 now. The surge is the 10-year bond yield to above 4.6%, ensuring capital flows from emerging markets like India.”
"The latest data from the U.S. indicate the resilience of the U.S. economy, and unemployment has come in better than expected at 4.1%. This means the possibility of more rate cuts by the Fed in 2025 is receding. This will further push up the bond yield. In brief, the macro construct is not favorable for the return of the FIIs in the near term. They are likely to press further sales, putting pressure on the market," he added.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.
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