Rs 25,000 crore FII exodus ends Nifty's 4-month bull run but August could be much worse

Economic Times

3 days ago

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India's benchmark Nifty index is crashing through a critical support level, ending a four-month winning streak in dramatic fashion as foreign institutional investors (FIIs) unleash a massive Rs 25,000 crore sell-off over just eight trading days. With August historically delivering punishing losses, Trump's higher than expected 25% tariff on Indian goods and disappointing Q1 earnings season, market veterans are bracing for an intensified sell-off in the coming month.In the last 10 years, August month has seen losses in four of the last 10 years. While the average return sits at a modest 1%, the brutal reality of sharp corrections looms large as multiple headwinds converge. FIIs have already played it safe by being net sellers in all the last 8 sessions and offloaded around Rs 25,000 crore worth of stocks from the Indian market. Brent crude oil prices have also jumped 7% in the last one week to $72-23 a barrel and on Wednesday, Indian rupee posted its steepest one-day drop since May and hit a five-month low of 87.5125."On analysis of the last 10 years, conditional probability of a positive August month, given a negative July is zero, suggesting that ongoing weakness could spill over to next month," warns Anand James, Chief Market Strategist at Geojit Investments Limited.July's negative return of more than 2% has shattered the momentum that powered markets higher through the first half, despite the encouraging 8% gains recorded earlier in the year. James draws parallels to 2019, the only other negative July in the past decade, when similar first-half strength of 8.4% eventually gave way to a more subdued second-half return of 3.5%.Technical indicators are flashing red across the board. Strong support levels now cluster around 24,450-23,600, with the critical 200-day Simple Moving Average positioned at 24,061. The broad market's health is deteriorating rapidly with only 53% of Nifty 500 constituents trading above their respective 200-day SMAs."This percentage is the lowest since mid June, when Nifty staged a recovery from similar levels, which makes 24,650 a critical downside marker," James notes, identifying the make-or-break level that could determine whether markets find their footing or plunge deeper into correction territory.The macro environment offers little respite. Shrikant Chouhan, Head Equity Research at Kotak Securities, highlights the twin threats weighing on sentiment: "The market's trajectory in August will primarily hinge on two key factors: developments on the tariff front and the earnings performance of Nifty 50 companies."The corporate earnings season has delivered a harsh reality check, with minimal positive surprises and largely underwhelming results failing to justify elevated valuations. Adding salt to the wound, the Indian rupee continues its relentless slide against the dollar, while bond yields remain anchored around 4.40%, a combination that's providing little comfort to already jittery foreign investors."In the absence of meaningful domestic liquidity support, markets may exhibit weakness," Chouhan warns, projecting a range-bound movement between 24,500 and 25,500 unless a decisive breakout triggers trending action.The FII exodus represents more than just temporary profit-taking. With uncertainty swirling around potential US tariffs on Indian exports and a weaker-than-expected Q1 results season, institutional money is flowing toward safer havens, leaving domestic markets vulnerable to further selling pressure.US President Dondald Trump's decision to impose a 25% tariff on India could weigh on FII flows. Thedirect impact, Nuvama said, is likely to be on stocks/sectors where the US sets the marginal price – pharma, auto ancillaries, a few industrials, cables and wires, tiles, etc.'However, the indirect impact of capital flight is likely to be more dominant and could weigh on SMIDs and high-beta domestic cyclicals (real estate, NBFCs and industrials). On the other hand, an INR depreciation could help IT and it could potentially outperform given the now low relative valuations. Overall, we maintain a cautious stance on markets,' Nuvama said.Yet amid the doom and gloom, some analysts detect glimmers of hope. Vinod Karki from ICICI Securities acknowledges that the "sharp rise in equities since Mar'25 lows is limiting a further rise in the immediate term," but maintains that once tariff uncertainties fade and monetary-fiscal stimulus gains traction, "equity markets are likely to take out the previous peak of ~26,000 seen in Sep'24."The risk premium for India has compressed to historic lows, with the 10-year bond yield spread over the US narrowing to just 193 basis points – levels not seen since 2004-05. This development suggests elevated price-to-earnings valuations may be justified if India's relative macro strength persists.For now, however, the immediate outlook remains treacherous. James's favoured scenario expects "upsides to be limited to 25,330-550, and downsides to not breach 24,000 mark in August", a narrow trading range that offers little comfort to momentum-driven strategies.As August unfolds, all eyes will remain fixed on the critical 24,000 support level. A breach could unleash the kind of selling cascade that transforms what began as a routine correction into something far more sinister. In a market where historical precedent suggests zero probability of August gains following a negative July, investors would be wise to batten down the hatches for what could prove to be a turbulent month ahead.: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)