Analyst Call Tracker | Slowdown weighs on consumption in January, optimism seen in financials despite tight liquidity

FIIs continued their sell-off in January, adding pressure on the rupee.

The markets’ performance in January left investors unimpressed as the benchmarks extended their losses over the past two months. January kicked off on a high, with investors starting the year on a positive note. However, the optimism broke down through the month, causing the index to briefly dip under the 23,000 mark. This caused bulls to spur back into action, and the index climbed from lows to settle mildly in the red for the month.

Downwards GDP revision

One of the biggest shockers for the markets and economists was the Indian government’s lower-than-expected estimates of India’s gross domestic product for FY25. The Central Government pegged it at 6.4 percent, a significant slowdown compared to the 8.2 percent growth recorded in FY24, marking a four-year low.

While a slowdown was expected as consumption cooled, analysts had pegged the growth at 6.8-7 percent for FY25. The markets were quick to react, with investors selling off their holdings as the sentiment soured further. According to the Finance Ministry, the macro slowdown was resultant of tight liquidity conditions coupled with structural factors.

The slowdown in consumption can be seen in the Nifty 50 stocks with most pessimism, as FMCG, consumer staples, and auto firms dot the list.

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Trump trumps again

The U.S. election was among the most closely watched events for the markets in 2024, culminating in the win of Donald Trump. The former President returned to power on January 20, 2025, securing his seat for four more years.

With Donald Trump’s return came the imposition of broad-based tariffs, with BRICS nations, Canada, and Mexico among the key targets. The move sent the U.S. dollar soaring to highs, while in contrast, the rupee stumbled to lows. U.S. Treasury yields also saw an uptick, leading to a flurry of foreign capital outflows from India.

During the month, export-oriented sectors such as IT services and pharma tanked sharply, with their indices cracking up to 10 percent during the month. The near-term outlook for these sectors remains damp as uncertainty roils the investor sentiment.

Q3 earnings disappoint

The earnings season for the December quarter was off to a shaky start in January. India Inc.’s growth was not up to analysts’ expectations, leaving the markets wanting for more.

Swathes of companies reported a miss on margins and shared weaker guidance, leading to a flurry of downgrades and cuts in forward earnings estimates. According to a note by Motilal Oswal, a mere 37 companies’ earnings were upgraded by more than 3 percent, while 137 companies’ earnings have been downgraded by more than 3 percent.

The poor earnings coincided with the ongoing market correction, adding further selling pressure to the stocks that reported poor growth for the October-December period.

RBI’s liquidity injection

The clamour for a rate cut from the Indian central bank reached a fever pitch in January. Tight liquidity conditions caused the banking system’s liquidity to fall to 15-year lows, resulting in a cash deficit of Rs 3.3 lakh crore.

FII selling amid Trump’s tariffs threats led to currency depreciation, and the RBI burned its dollars to keep the rupee afloat. Experts pointed towards the central bank’s forex

Towards the end of the month, the Reserve Bank of India stepped in with a liquidity injection, announcing a Rs 60,000-crore purchase via open market operations in three tranches, coupled with a variable rate repo auction in February.

This offered the financial system some relief, but the relief was only temporary, as experts suggested that tight liquidity conditions would persist even after a rate cut. However, despite this, five of the 10 stocks with the most optimism in the Nifty 50 belonged to the BFSI space, as the correction left very few pockets of fair valuation.

So what’s next?

As there are no strong domestic triggers to influence the markets, participants are paying close attention to global news, currency fluctuations, and institutional flows for directional cues.

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