Market rebound: Why investors are wary of its sustainability

Market rebound: Why investors are wary of its sustainability

Even as Indian equities extended their sharp rebound in early trade on March 19, market watchers remain cautious, attributing the surge more to sentiment than fundamentals.

On March 18, the Sensex jumped 1,131 points, while small- and mid-cap indices gained over 2%, breaking a week-long losing streak. All sectors ended in the green, signalling a relief rally.

As of 11:15 AM on March 19, the Sensex was trading at 75,461.20 , up by 0.21%, while the Nifty rose 0.26%. 2881 stocks advanced, while 871 stocks declined.

Rally or temporary respite?

Despite the rebound, analysts anticipate further corrections. "We were in the oversold zone for many stocks, and today’s gains were largely technical," said Aishvarya Dadheech, Founder and CIO of Fident Asset Management.

Changes in outstanding positions in the derivatives markets showed that the 1100-point recovery in the Sensex on March 18 was a result of massive, short-covering by foreign institutional investors after a month of relentless selling. Data on the exchanges showed that 101 stocks out of the 220 in the futures and options segment saw short covering from FIIs. In the cash segment, FIIs emerged as net buyers yesterday to the tune of Rs 1463 crore.

Echoing caution, Guarang Shah, Head Investment Strategist at Geojit Financial Services said, “The recovery is decent, but global headwinds persist.” The US market closed in the negative yesterday with the S&P 500 declining 1.07% and the Nasdaq falling 1.71% at close of trading. Trump’s on-again-off-again tariff policy and other economic policy shifts are making investors nervous. Meanwhile, even though all eyes will be on the FOMC meeting outcome today, investors are largely expecting no change in rate from the FOMC. “Markets are also very focused on the uncertainity of tariff talks to watch for its impact on inflation in the coming months amid the much-awaited Fed announcements.” said Ajit Mishra, SVP Research at Religare Broking.

As for stocks, mid-caps and small-caps in India continue to be on fragile ground. Broader market declines since September 2025 have erased nearly a year’s gains for 50% of BSE MidCap and SmallCap constituents, with a quarter now losing their three-year returns. Both indices are down 20-23% from their peaks.

READ MORE: Small and midcap shares extend rally as bulls scout for value in broader market

Mishra highlighted the ongoing uncertainty: “It’s too early to call this a trend reversal. Small and mid-caps remain vulnerable, and sustained buying from FIIs would be needed to confirm stability.”

FIIs – will they, won’t they?

The one good news amid all the chaos is that the US Dollar Index has come down from the November 2024 highs of 110 to 103 levels, signalling a potential shift in capital flows towards riskier assets. Ajay Bagga, Chairman of Elyments Platforms, noted, “As US exceptionalism on growth and stock prices fades, flows will shift to emerging markets, and India will benefit—but this may take until May or June to materialise.”

The broader emerging market landscape seems to be shifting, with inflows resuming after a four-month period of dollar carry unwinding. Notably, foreign inflows into Hong Kong funds surged to a record USD 1.6 billion, while China funds saw their highest inflows in five months at USD 926 million. Capital has also returned to South Korea, Taiwan, Brazil, Mexico, Indonesia, Thailand, Singapore, and Malaysia over the past three weeks.

READ MORE: India-dedicated funds face persistent outflows despite rebound in Global Emerging Markets

In contrast, India remains the only major emerging market still experiencing outflows, though the pace has moderated. Outflows from Indian equities slowed to USD 113 million this week, significantly lower than the average weekly outflow of USD 460 million since the start of 2025, according to Elara Global Liquidity Tracker.

Sectoral trends and institutional moves

Infrastructure, capital goods, and real estate were the standout performers among mid and small caps in the recent rebound, however, experts said IT and pharma may emerge as gainers in the medium-term despite current selling pressure. Meanwhile, institutional flows have been selective.

According to a February note from Motilal Oswal, mutual funds increased exposure to private banks, NBFCs, healthcare, telecom, and metals, while trimming stakes in capital goods, technology, autos, and PSU banks. Midcap inflows favoured Yes Bank, IDFC First, Prestige Estates, and AU Small Finance, while smallcaps saw buying in Happiest Minds, Signature Global, and Glenmark Pharma.