Moneycontrol Pro Panorama | Have Indian markets bottomed out?

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Investors, particularly retail investors, are keen to see a reversal of trend in Indian stock markets. Those who entered the markets at the peak are sitting on significant paper losses. Hence, it’s no surprise that the extended recovery for the second consecutive day on Thursday raised hopes that the worst may be behind us.

On March 6, headline indices such as the Nifty and the Sensex closed in positive territory—with the Nifty surging above 22,500 and the Sensex up by 609.86 points—fuelling bullish sentiment. While hopes of a reversal are high, it is important to take a realistic view of the market dynamics. To tell the truth, nothing much has changed fundamentally in the past two days for the market to make a pivot.

One could argue that the market’s rally has been buoyed by favourable global cues.  However, there are underlying factors that signal caution. None of the risk factors—both global and local—have changed.

For example, on the currency front, the Indian rupee’s recent roller-coaster ride reminds us of persistent volatility. Although the rupee initially gained on RBI’s liquidity injections, selling pressure by foreign institutional investors (FIIs) soon reversed these gains.

The rupee is now expected to trade in a narrow band of 86.80 to 87.25, with FII outflows and uncertainty over trade tariffs adding to the precarious outlook. Moreover, any volatility in crude oil prices may further pressure the rupee, complicating the market’s recovery.

The global tariff war is no longer a looming threat but a reality. The countries targeted by the Donald Trump administration in the trade war are hitting back, whether it is China or even perceived allies of the US, including Canada and Mexico.

Against the tumultuous global backdrop, foreign investors have indulged in a selling spree, taking home handsome profits. Growth triggers are missing, and risk factors are looming.

What’s on the mind of Indian retail investor?

While domestic institutional investors (DIIs) have absorbed much of the FII selling, it is the behaviour of retail investors that may ultimately determine the market’s future direction. According to Kotak Institutional Equities’ Sanjeev Prasad, the apparent resilience of the headline indices is misleading.

Over the past 9-12 months, retail investors have been buying stocks almost indiscriminately—both directly and through mutual funds—thereby inflating market valuations. Many new retail entrants have joined at elevated price levels, and trailing returns over 3, 6, and even 12 months have turned weak or negative.

This dynamic suggests that the rally may be superficial, driven more by a flood of funds than by solid fundamentals. Many retail investors are now sitting on substantial paper losses, which could potentially trigger a sharp correction if sentiment shifts. In essence, while the market may look robust on the surface, the fragility of retail investor behaviour hints at underlying vulnerabilities that could unravel the recovery.

So, what lies ahead?

Looking forward, several factors could shape the market’s trajectory. Continued FII outflows and lingering uncertainties over global trade policies—such as the ongoing tariff disputes—might restrict any sustained upward movement. Additionally, fluctuations in crude oil prices, impacting the rupee and commodity-sensitive sectors, could add another layer of volatility.

In this environment, the cautious stance of retail investors could serve as the real litmus test for market stability. If retail sentiment shifts from exuberance to caution, it might signal that the market has not yet found its floor. Conversely, if retail investors begin to re-engage and support the market despite recent losses, it could pave the way for a more durable recovery.

While one could speculate that Indian stock markets appear to have bottomed out based on headline indices, a deeper analysis suggests that the rally is underpinned by a fragile mix of factors.

Investors, therefore, would be wise to remain cautious and keep a close eye on retail sentiment as the market navigates these uncertain waters.

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