Nifty 50 wipes out last 1-year gains: More downside ahead or a rebound to record highs?

Mint

5 days ago

The Indian stock market is under significant selling pressure, with the benchmark Nifty 50 down nearly 1 per cent over the past year on concerns over an elusive India-US trade deal, unimpressive earnings, and sustained foreign capital outflow.
While the index is still up about 4 per cent year-to-date, on a monthly scale, it has lost over 3 per cent in July so far, looking set to snap its four-month winning streak.
On July 26, the Nifty 50 hit an intraday low of 24,598.60, extending losses to the fourth consecutive session. Meanwhile, the index hit its 52-week low of 21,743.65 on April 7 this year after hitting a record high of 26,277.35 on September 27 last year.
After hitting a record high in September, the Nifty plunged due to heavy foreign capital outflow, stretched domestic market valuations, and weak India Inc. earnings. On a monthly scale, the Nifty fell for five consecutive months, from October 2024 to February 2025.
The oversold market rebounded in March on valuation comfort, hopes of earnings revival, and healthy macroeconomic indicators. The domestic market remained resilient despite geopolitical conflicts, India-Pakistan tensions, and a trade war led by US President Donald Trump's tariff policies.
But now, investors' risk appetite has turned weak amid a lack of fresh triggers, persisting concerns over Trump's tariffs, and weak earnings.
"Currently, the market lacks strong triggers from two key perspectives. First, corporate earnings are largely in line with expectations and are therefore not sparking any significant momentum. Second, uncertainty surrounding an India–US trade deal persists, which is weighing on investor sentiment," said Pankaj Pandey, the head of research at ICICI Securities.
The domestic market appears to be oversold, so a rebound in the near term is possible. However, sustainable gains are only possible if there is visible earnings growth.
The head of research at ICICI Securities is optimistic that the worst may be over and the domestic market will see a healthy rebound in the second half of the year.
"We continue to maintain our year-end target for the Nifty at 27,000. If there is no further rate cut, we expect earnings from the banking sector—one of the market's key drivers—to begin improving from Q3 onwards. This will boost the market," said Pandey.
The IT sector is likely to remain subdued, while the consumption sector may see some recovery, supported by the festive season and the delayed benefits of income tax exemptions.
"Overall, second-half earnings are expected to be stronger. By then, the impact of US tariffs may also start to be felt, potentially triggering relative positivity for emerging markets like India," said Pandey.
One of the key reasons behind the Indian stock market's recent downtrend is sustained selling by foreign portfolio investors (FPIs).
Experts pointed out that the US market has been resilient despite anticipations of tariff headwinds. This has kept FPIs in a selling mode in India.
"In the US, the market is not showing any significant weakness. Contrary to earlier expectations, economic data remains strong. One possible reason is that pre-selling and inventory stocking may have occurred earlier in the cycle, and that inventory is still being consumed. As a result, the anticipated effects of higher inflation and slowing growth have not yet materialised," said Pandey.
However, Pandey added that it is unlikely that such steep tariffs will be fully absorbed by the system.
"In the second half of the year, as the US Fed has also indicated, inflationary pressures in the US are likely to rise. In that situation, FPIs may come to emerging markets like India," said Pandey.
Some experts see another angle behind the FPI selloff.
Rohit Srivastava, the founder and market strategist at Indiacharts.com, believes the primary reason behind FPI selling is not short-term but long-term.
"It is the introduction of long-term capital gains (LTCG) tax on foreign investors. Since the implementation of LTCG, net FPI inflows into India have declined noticeably. They haven't been major buyers the way they were prior to the tax regime change," Srivastava said.
Srivastava said this trend doesn't appear to be linked to any specific year or earnings cycle.
"Even when earnings were growing two years ago, FPIs were net sellers throughout the year. This suggests that the reason is not short-term, but structural and long-term in nature. Globally, FPIs tend to invest less in countries that impose withholding taxes. So, even if India remains fundamentally attractive, many funds stay away due to tax-related concerns," said Srivastava.
Nevertheless, Srivastava believes the domestic market is oversold and the Nifty 50 may hit the 27,000 mark by the end of the year.
"I don't see the Nifty falling below 24,500. The market appears oversold, and a rebound could begin at any time. Our year-end target remains unchanged at 27,000," said Srivastava.
"On the downside, 24,500 serves as a strong support level, while on the upside, we see resistance at 24,994," Srivastava said.
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