Riding the storm, turning Volatility into opportunity, Investment behaviour, strategies, key Lessons and way forward
Recap of performance in Jan’25 and current month
The Indian stock market had been in corrections since Oct’24 after hitting all time high in September 2024. Nifty has corrected 0.6% in Jan and -2.5% in Feb so far. Four months of consecutive corrections since Oct’24 is an exceptionally rare occurrence that hasn’t happened in the last 23 year. The corrections have continued in this month as well. The Nifty has declined nearly 12% in the last four months. The NSE index has witnessed six significant price corrections in the last one decade, excluding the COVID-related panic sell-off. Excluding the Covid-19 panic sell-off in March 2020, the current fall in Nifty is the second worst in a decade. According to Ace Equity data, the Nifty registered its biggest market correction in the March 2015 – February 2016 period in the last 10 years, as the index cracked 21 per cent. The market made some attempt to recovery this year so far but any small rally also getting sold into. This is in contrast to global markets situation where many markets are near all time high including US markets and Europe Market. Indian market has underperformed almost all the major markets recently.
There are various factors behind these corrections as follow (though full details can be referred in the past quarterly update published on the website)
Over valuation concerns – Indian equities had become overvalued, surpassing fundamental growth. Domestic fund inflows, particularly record SIP contributions, continued to drive liquidity and inflate prices. For instance, in case of Nifty Midcap 150 Index, while the past 5 Year median Price-to-book value (P/B) ratio is 3.6 times currently, the ratio had reached 5.9 times as of September 2024 end, up 64% from the median level. Similarly, in case of Nifty Smallcap 250 Index, while the past 5 Year median P/B ratio is 3.3 times currently, the ratio had reached 4.3 times as of September 2024 end, up 30% from the median level.
US Yield Rise & FII Outflow – The US 10-year government bond yield, which stood at 3.618% in mid-September, rose to 4.441% by mid-November. It later hit a new high of 4.794% in mid-January and currently hovers around 4.525%. Higher yields offer FIIs better risk-reward opportunities in US treasuries. Additionally, increased borrowing costs make funding expensive, prompting FIIs to withdraw capital.
Dollar Strength & INR Weakness – The Indian Rupee has weakened against the US Dollar, falling from Rs. 83.5/USD in September 2024 to Rs. 87.5/USD last week. A weaker INR reduces foreign investors’ net returns in their home currency, prompting some FIIs to exit, and further pressuring the rupee.
Slowdown in Economic Growth – India’s GDP growth rate declined from 8.2% in FY2023-24 to 5.4% in Q2 FY2024-25. Corporate profit growth, which was strong in FY2023-24, has also slowed. This lower growth reduces the present value of future cash flows, leading to stock price declines.
Global Events & Market Sentiment – Market sentiment plays a crucial role. Sharp volatility index spikes in recent months reflect the fragile investor sentiments. Uncertainty around Trump’s tariff policies and ongoing geopolitical tensions further exacerbate volatility. The S&P 500 has reached new highs, surpassing the 6100 level in January. This would have drawn FII investments into US equities, reducing allocations to Indian stocks.
Primary Market & Gold Shift – The lure of IPO listing gains has driven oversubscriptions, leading investors to liquidate secondary market holdings, increasing selling pressure. Additionally, gold has gained momentum as an alternative investment, shifting capital away from equities.
This year so far has been tough for the Indian market. There has been relentless selling by FII though compensated almost equally by DII buying, thanks to SIPs inflows from retail Investors. FII sold for Rs 87354 Crores In Jan and Rs 28334 crores in feb so far whereas DII bought for Rs 86591 crores and Rs 33851 crores respectively. There are many domestic and global factors which will impact the market performance going forward and need to be closely monitored.
Sectoral performance
The markets witnessed broad corrections including all sectors and market cap. The small-cap and mid-cap segments have had a remarkable rally over the past two years, with Nifty Smallcap 100 and Nifty Midcap 100 delivering returns of over 78% and 70%, respectively. But in recent corrections midcap fell by 16% and smallcap by 20% from all time high vs 12% in nifty. At individual stocks level and sectors the corrections were even more. The sectors which corrected the most this year so far are realty -20%, media -18%, energy -12%, pharma -11%, PSU -10%. The sectors that corrected least are IT -5%, metals -3%, , bank-2%. Hence, it is time to rebalance the portfolio considering these corrections and investing in sectors and stocks where value seems attractive for better returns from long term perspective. Further, the sectors that may benefit because of income tax exemption up to Rs 12 lakhs p.a. are FMCG, Consumer durables and electronics, auto, realty, financial services.
Budget Highlights
1 Direct Tax – No personal income tax payable upto income of Rs 12 lakh (i.e. average income of Rs 1 lakh per month other than special rate income such as capital gains) under the new regime. This limit will be Rs 12.75 lakh for salaried tax payers, due to standard deduction of Rs 75,000.
The new structure will substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings and investment.
Revenue of about ₹ 1 lakh crore in direct taxes will be forgone.
Revised tax rate structure
| 0-4 lakh rupees | Nil |
| 4-8 lakh rupees | 5 percent |
| 8-12 lakh rupees | 10 percent |
| 12-16 lakh rupees | 15 percent |
| 16-20 lakh rupees | 20 percent |
| 20- 24 lakh rupees | 25 percent |
| Above 24 lakh rupees | 30 percent |
2. FM introduced the New Income Tax Bill next week. New Bill is half of the present Income Tax law in terms of chapters and words. The new Income-Tax Bill is much clearer and direct in text so as to make it simple to understand for taxpayers and tax administration, leading to tax certainty and reduced litigation.
3. TDS on Senior Citizen Rs 1 lakhs plus on interest TDS on Rent Rs 6 Lakhs onwards
4. 90 Lakhs filed updated returns. Now you can file Income Tax Returns for past 4 years in ITR U
5. The focus is on inclusive development and boosting middle-class spending.
6. Budget aims to accelerate growth and unlock the nation’s potential. Fiscal Deficit at 4.4% of GDP
7. Budget will initiate reforms in primarily 6 domains — taxation, urban development, mining, financial sector, power and regulatory reforms.
Global Market outlook
In the months following the US election, there was a sharp rise in US bond yields and a sharp rise in the value of the US dollar against major currencies. This reflected investor expectations that a combination of tax cuts, tariffs, and immigration restrictions would boost inflation and lead the Federal Reserve to ease monetary policy more gradually if at all. Since mid-January, however, bond yields have fallen and the value of the dollar has fallen or stabilized, especially against the Japanese yen, the British pound, the Canadian dollar, and several emerging market currencies. Trump signed an order imposing 25% tariffs on Mexico and Canada, as well as a 10% duty on China. In response, countries are announcing retaliatory tariffs. Trade tensions already simmering with the EU prompted it to weigh in on the Trump tariffs and work on a strategy for responding to any potential US action.
Global growth to remain subdued amid lingering uncertainty Lower inflation and monetary easing offer relief, but trade tensions, high debt burdens, and geopolitical risks cloud the outlook. Despite falling inflation, improving labour market conditions, and monetary easing, global growth is projected to remain below the pace seen before the pandemic, and the world economy continues to face significant uncertainties.
Currency and commodity market update
The Indian rupee depreciated for a seventh straight year in 2024 and continued in 2025 as well, largely due to strengthening of US Dollar, FII outflows, slowing growth and a wider trade deficit. Almost all the currencies have depreciated against US dollar. The rupee depreciated to a new low of 87.95 prompting RBI intervention. RBI spent $77 billion from its foreign exchange reserves through intervention in the spot market to defend Indian rupee from falling sharply. RBI is countering the narrative of further depreciation following a reduction in the policy repo rate. The central bank has cut the policy repo rate by 25 bps on Friday — first in five years — in line with market expectation.
Gold & Silver Update: Gold and silver have continued the uptrend this year as well after stellar performance in 2024. Both add diversification, hedging benefits and risk management in falling equity markets. The current outlook is mildly bullish in view of global uncertainty and high returns in the past. Gold currently trading at Rs 86k/ 10 gm as on date and Silver closed at Rs 97k/ 1kg.
Outlook for the Indian Market
The year 2024 was a milestone for Indian investors, with strong market performance, particularly in small- and mid-cap segments, and a surge in market capitalization surpassing coveted mark of 5 trillion USD. With the recent corrections post Oct 2024 the market cap as on date stands at 4.6 trillion USD and more corrections seen in mid cap and small cap space. Significant boost in this market cap came also from record number of IPOs hitting the market with high interest from Investors. However market cap grows over time in line with GDP growth of country and corporate performance. Hence the recent correction has brought companies at better valuations. The prudent approach and strategies for Investors during current times are a) diversify investments across asset class like equity, bond, gold, realty and International markets b) Invest in quality companies at reasonable valuations or else take professional fund manager services using investment in quality mutual funds schemes in diversified manner c) invest regularly via SIPs and increase SIPs during correction d) remain invested for long term despite market volatility e) do prudent rebalancing during significant movements in asset classes. Further, consult your investment advisor periodically in alignment with financial goals, risk tolerance, and time horizon.
Fundamental outlook: Indian market is trading at better valuations after corrections. The corrections were seen across sectors including largecap, midcap and smallcap space. Many individual stocks have corrected even more. The corrections between 20% to 50% give opportunity to invest in quality stocks from long term perspective. Most of the IPOs are trading below their listing price. There are still many headwinds like geo political risk, macro concerns which may impact the economy and market. Market may experience some stability after recent corrections but closely track events and policies which may provide further directions.
Technical outlook: Indian market has been volatile last month and this month with downtrend. Nifty is unable to sustain above 23500 since last few weeks. However immediate support is seen at 22800 levels since Nifty has bounced back from this levels few times. The broad trading range as of now is 22800 to 23500. Nifty is volatile with mixed trend on basis of various technical parameters. The monthly RSI of 58 indicates neutral trend whereas weekly RSI of 40 indicates market is in oversold zone due for pull back. The immediate resistance for nifty is 23750 and may face strong resistance at 24250 levels. The immediate support for nifty is seen at 22800 and major support at 22250
