Indian equity markets are turning cautious, assessing the possible fallout of the Pahalgam terror attack, with most investors weighing the scale of India's potential military and diplomatic responses, before placing further bets. Experts say while the market's initial reaction was measured, any significant escalation could unhinge sentiment rapidly.
Meanwhile, muted earnings and a rebound in foreign flows - driven by tactical shifts from active managers - are pulling markets in opposite directions, likely leading to consolidation rather than a decisive breakout.
“Currently, the market does not seem worried about any kind of military retaliation. It might remain contained, like earlier instances, which means it will not mean any risk to markets because of the evolving situation,” said Prashant Khemka, Founder of White Oak. The scale of the Pahalgam attack, PM Modi's immediate return from Saudi visit, and statements over the past two days indicate that the retaliation may be more severe this time, some investors feel. “A significant escalation, however, will make all calculations go out of the window. You can never be prepared for such an event,” said Samir Arora of Helios Capital, reflecting a broader mood of uncertainty.
The Nifty 50 has been largely flat to negative in the past two sessions, which is a 'tacit acknowledgement by the market that we need to wait and watch', said Sunil Singhania of Abakkus Asset Manager. The veteran money manager said if the conflict remains contained to the region, there may not be a major impact on equities. However, valuations remain stretched. “It’s a tough market. From these levels, it will consolidate,” he said.
Banks Lead, But May Wobble
Since April 9, when US President Trump announced a pause on tariffs, the Nifty has gained 8.1 percent while the BSE Mid and Smallcap indices have jumped 10.2 percent and 10.9 percent, respectively. Banks have powered much of the rebound, contributing nearly a third to the 1,850-point Nifty rally since April 9. Lenders accounts for 22% of the Nifty’s weight, benefited from a combination of value rotation, safe haven buying, and a squeeze on short positions. “More than Rs 5 lakh crore of liquidity injection has been a big boost for banks. And since banks had not performed all of last year, they were ripe for a rally,” Singhania said.
Technical factors too have played a role. market expert Sushil Kedia said banks rallied on the back of “heavy safe-haven buying — that they will not be impacted because of tariffs. Technically, the shorts in the market also got squeezed, accelerating the rebound.” However, with most of the shorts now covered, he warned “the counter is hollow... a leg down is warranted.”
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Foreign Flows Signal Tactical Shift
Foreign institutional flows have picked up in recent sessions despite the volatility, but analysts warn against reading too much into this. In the past seven sessions, FIIs have bought close to $3 billion, although for the month of April, they are net sellers to the tune of nearly $550 million.
“The foreign flows have been fairly strong in the past few sessions and that is unexplained by passive flows,” said a head of equities at one of the foreign brokerages. “This can only be explained by a tactical shift from US markets into other markets” due to rising policy uncertainty under Trump. “As of now, institutions don’t seem to be worried about any potential escalation in conflict because of the Pahalgam attacks.”
Still, the brokerage head cautioned that “fund flows cannot be relied upon — they can be quite fickle.” What matters more is earnings and valuation. “The biggest risk to markets stems from slowed earnings growth and elevated valuations.”
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Earnings Offer Few Comforts
As Q4FY25 earnings trickle in, the broader picture is one of moderation. A Moneycontrol analysis of 111 companies (excluding energy, banking, insurance, and financial services) with consistent data over the past 10 quarters reveals that operating profit grew just 6 percent year-on-year - the slowest in five quarters and the seventh consecutive quarter of single-digit growth. Net profit also rose 6 percent year-on-year in Q4FY25, slowing from 12 percent in Q3FY25 and 14 percent in Q4FY24. Net sales growth moderated to 5.5 percent - weakest in three quarters - compared to 6.3 percent in the previous quarter and 6 percent a year ago.
Among the heavyweight stocks, India’s leading IT players - Infosys, TCS, Wipro, and HCLTech - concluded a tough Q4FY25 with sequential revenue declines. FMCG bellwethers Hindustan Unilever and Nestle India too posted weak earnings as high input costs and muted urban demand weighed on margins and volume growth.
Another head of sales from a domestic institutional brokerage pointed out that while IT companies have rebounded despite weak outlook, the enthusiasm is more about relative value than fundamentals. “You get short spurts of rally in pockets... managers are saying buying single-digit growth at 25x P/E is better than paying the same growth in FMCG at 45x P/E. Neither is a good case,” he added.
The sales head of the brokerage also flagged the weak consumption trend. “The theory that tax savings effected in the budget will spur consumption is flawed — clearly we are not seeing any effect of that in the demand numbers.”
Read More: Market experts flag retaliation as potential trigger for near-term volatility
The Bigger Picture
Experts agree that while India’s macro remains relatively resilient, near-term equity performance will hinge on the intensity and duration of any potential military and diplomatic counter-attack in response to Pahalgam, and how much earnings can deliver against lofty valuations. The broad direction of the markets appears to be: if the conflict stays contained, we consolidate; if it escalates, everything changes.
For now, investors remain on edge, with eyes on both the border and the earnings sheets.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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