Sensex, Nifty end higher on RBI's liquidity measures; broader market struggles to keep up

Tech stocks were in focus following the debut of DeepSeek, a Chinese AI startup offering a low-cost alternative to ChatGPT.

After closing in red for two sessions, Sensex and Nifty ended higher on January 28 led by a nearly 2 percent rise in Nifty Bank, buoyed by the Reserve Bank of India's liquidity-boosting measures that spurred hopes of a potential rate cut in February. In contrast, healthcare and FMCG stocks lagged behind.

India's central bank announced measures on January 27 to inject liquidity into the banking system, including bond purchases and dollar/rupee swaps, which analysts believe could be a precursor to a February rate cut. These moves, estimated to inject Rs 1,50,000 crore into the system, follow months of liquidity stress that had pushed short-term borrowing rates higher.

Rate-sensitive stocks such as HDFC Bank and Axis Bank surged 3 percent and 4 percent following the news. LIC Housing Finance, Bajaj Finance, and M&M Financial Services also gained between 1-5 percent. Greed & Fear has increased the weightage of HDFC Bank in its portfolio to 4 percent.

The benchmarks opened strong, recovering from a seven-month low touched in the previous session. The sell-off was driven by disappointing Q3 earnings, uncertainty over U.S. President Donald Trump's trade policies, and persistent foreign outflows.

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At close, the Sensex climbed 535 points or 0.7 percent to 75,901, while the Nifty 50 rose 147 points or 0.6 percent to 22,976. On the NSE, 987 stocks advanced while 1,582 declined.

"The market is likely to remain volatile leading up to the FOMC and Budget 2025," Sanjeev Hota, Head of Research at Sharekhan told Moneycontrol. "Beyond the FOMC, we also have the RBI meeting post-Budget. Alongside these, the Q3 earnings season is ongoing. The volatility is expected to continue, but given the amount of short positions in the market, we could see occasional bouncebacks, as we did today. The recovery was mainly seen in large caps, driven by the RBI's liquidity measures. However, I expect significant volatility to persist," he said.

Axis Bank, Shriram Finance, Bajaj Finance, HDFC Bank, and Bajaj Finserv were among the top Nifty 50 gainers, rising 2-5 percent, while Sun Pharma, Hindalco, Bharat Electronics, Grasim, and Britannia fell 1-4 percent.

Realty stocks mirrored the rally, gaining over 2 percent as investors bet on lower interest rates.

Nifty Pharma extended its 2.5 percent decline from the previous session, falling over 2 percent amid concerns about the impact on AIDS drug manufacturers following the U.S. decision to pause foreign aid.

Meanwhile, tech stocks drew attention following the debut of DeepSeek, a Chinese AI startup offering a low-cost alternative to ChatGPT. The company's use of cheaper chips and smaller data models has raised questions about the sustainability of current AI-related demand projections.

Shares of AI-driven electronics manufacturing services (EMS) firms like Dixon Technologies, Kaynes Technology, Netweb Technologies, and MIC Electronics tumbled today. Kaynes Technology led the losses, plunging 10 percent after revising its FY25 revenue guidance downward. Dixon Technologies and MIC Electronics fell around 5 percent each, while Netweb Technologies hit the 10 percent lower circuit, further impacted by the expiry of its 1.5-year lock-in period.

Also Read | Deepseek Impact on AI Stocks: Dixon Tech, Kaynes Tech, Netweb shares crash up to 20%

Reacting to the disruption, Jefferies' Greed and Fear report cut exposure to Nvidia and TSMC by 2 percentage points and exited ASML and Hynix entirely. The report suggested AI investments might not remain as capital-intensive as anticipated, signalling a potential shift in the semiconductor industry.

The broader markets continued to struggle under the pressure of earnings slowdown and high valuations, with the BSE Smallcap index down 1.7 percent and the BSE Midcap index slipping 0.5 percent. The Nifty Smallcap 250 entered a bear market, plunging 25 percent from its record high of 18,688.

"What we're witnessing now is similar to the 2018-19 cycle, where mid-cap indices fell nearly 40 percent and small-cap indices followed suit. These cycles typically last 12-18 months. I expect deeper corrections in the next 2-3 months for mid-caps and small caps," Hota said.

Foreign Institutional Investors (FIIs) offloaded Indian equities worth over Rs 74,000 crore in January. According to market experts, macroeconomic slowdown, corporate earnings deceleration, and the INR weakness are playing a significant role in the FII selling. "Over the next 2-3 months, we could see more outflows. While long-only funds have started investing since December, most of the selling has been from ETFs, and that trend might continue for a while," Hota said.

This six-day trading week is bookended by two crucial events—the U.S. Federal Reserve's rate decision on January 29 and India’s Union Budget on February 1. Analysts suggest that while the Fed is unlikely to cut rates significantly, the market's focus has already shifted to the domestic fiscal roadmap.

Meanwhile, the European Central Bank is poised to cut its key deposit rate by 25 basis points on January 30, amid growing concerns over U.S. tariff threats clouding Europe's economic prospects.

"From a technical standpoint, there have been no significant developments in the Nifty50 index, but the support near the sloping trendline of 'Falling Wedge' seems to have its significance," said Osho Krishnan, Senior Analyst at Angel One." Krishnan said that on the levels front, 22,800 is a critical support zone on an immediate basis and on the flip side, 23,100-23,150 is the intermediate hurdle.

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