The Fed held rates steady, but Chair Jerome Powell made it clear—rate cuts are not coming anytime soon. If investors were expecting easy money, Powell pretty much told them to hold their horses. The bigger jolt? Markets had priced in rate cuts as early as March, but Powell’s cautious stance has recalibrated expectations.
For Indian markets, however, global jitters aren’t the only headache. The relentless selling by foreign institutional investors (FIIs), a mixed earnings season, and the upcoming Union Budget are charting the market’s direction. With limited room for policy manoeuvres, investors may have to adjust expectations and brace for a volatile, range-bound market.
When the Fed stays put, and the dollar stays strong
Powell’s comments reinforced that the Fed won’t rush into rate cuts until inflation cools further. A higher-for-longer interest rate environment keeps the US dollar strong, making emerging market equities—including India—less attractive for FIIs.
This is a direct hit for Indian stocks, as a strong dollar pushes global investors to stick with safer, high-yielding US assets rather than taking on risk in developing economies. The result? A continued flight of foreign capital out of Indian markets.
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FIIs keep selling, DIIs absorb the shock (for now)
Foreign investors have already pulled out $8 billion from Indian equities in January alone, largely due to concerns over valuations and global yield movements. The higher US yields climb, the harder it becomes for India to retain FII interest.
Thankfully, domestic institutional investors (DIIs) have stepped in, absorbing much of this selling pressure. But how long can they hold the line? If Powell delays rate cuts further, FII outflows may persist, testing the ability of DIIs and retail investors to keep markets afloat.
Since September, banking and IT stocks have held their ground, but most other Nifty stocks have taken a hit. In mid-and small-cap segments, the damage is deeper, with many stocks correcting by 30-50%. The blind optimism of buy-on-dips investors is now being tested, as falling prices don’t necessarily mean better valuations—especially when earnings fail to keep pace.
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Earnings growth: a reality check
Corporate earnings in Q3 have been a mixed bag. Across industries, margin pressures and cautious management commentary suggest that the coming quarters won’t be a smooth ride. This is where it gets tricky.
Market valuations need earnings growth to justify stock prices. But earnings are slowing, and rate cuts are delayed. Which means, stocks will have to work harder to climb higher.
At present, FY26 Nifty earnings growth is estimated at 12%, but fund managers caution that this could see downward revisions. This puts the spotlight on one key event—the upcoming Budget—as investors look for policy cues to gauge future growth.
The Budget: A tightrope walk
This year’s Budget won’t bring dramatic policy shifts, but investors will closely track a couple of things. Firstly, fiscal deficit management: staying on track for a 4.5% deficit target in FY26 means limited room for spending splurges. Secondly, capex spends: the government may only marginally increase the ₹11.1 lakh crore capex target for FY25, rather than expanding it as there is likely to be a yawning gap between what was budgeted for FY25 versus what was actually spent. Thirdly, sector incentives: if the Budget continues to push infrastructure and manufacturing growth, it could provide a much-needed sentiment boost.
One key difference this time? No pre-Budget rally. In most years, markets rally ahead of the Budget, anticipating growth-friendly measures. This time, markets have been weak, meaning any positive surprises could offer a short-term bounce.
However, don’t expect major tax cuts or stimulus spending, as that could impact the fiscal deficit and the approach thus far make it clear that the FM will prioritise the fiscal deficit target over loosening the purse to trigger a quick fix.
What to expect now?
With the Fed standing firm, FIIs selling aggressively, and earnings growth slowing, Indian markets will likely to move sideways at best. So where are the money making opportunities? Banking and life insurance stocks, which appear fairly priced, could offer some stability and decent returns in future. Across sectors, stock-picking will be key. Companies with strong earnings will command premium valuations in an overall sluggish market.
So, here is the bottomline. Powell isn’t in a hurry. FIIs are jittery. The Budget is likely to be more about fiscal prudence than fireworks. For investors, this isn’t a market for easy wins—it’s a stock-picker’s game now. In Buffett parlance, the time when the tide goes down…
Disclaimer: The views and investment tips expressed by investment 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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