Dalal Street, the financial hub of India, has seen an all-time bull run in the recent past. However, the recent picture paints a different story, with foreign investors withdrawing billions from Indian equities. The sell-off has drawn concerns regarding the sustenance of the growth in the market as well as the chances of a slowdown.
The question that remains paramount is, Is the Indian stock market headed for a correction, or is it just a short-tern blip in an extended bullish trend?
Foreign Portfolio Investors (FPIs) have been scaling down their exposure to Indian shares at a fast rate. It has been reported that since October 2024, FPIs have pulled out close to US$29 billion from Indian equities. This represents one of the biggest exoduses in recent times, triggering tremendous volatility in benchmark indices like the BSE Sensex and Nifty 50.
As a result, the Indian stock market has lost more than US$1 trillion in market capitalisation, an indication of investor fears over economic growth and corporate performances.
When US President Donald Trump made a statement that he would put tariffs on a reciprocal basis from April 2, global markets experienced a jolt, and Dalal Street witnessed a sudden sell-off. Foreign investors withdrew Rs 30,000 crore in panic within a few days after the announcement, and uncertainty surrounding the effect on Indian equities increased.
However, concerns over mutual tariffs have dissipated to a large extent because of robust domestic factors and the return of foreign investors. The last week was the best for the nifty since 2021, with a number of stocks that had experienced extended corrections beginning to recover as the market rally picked up pace.
Several macroeconomic and global factors have driven this trend.
Slowing economic growth: India's GDP growth slowed down to 6.4 percent, which is its weakest in four years. Though the number is still strong based on international standards, it has weakened investor confidence, especially from FPIs, which were looking for better returns.
Corporate earnings worries: Most blue-chip firms have announced below-expected earnings, and that has raised eyebrows over the profitability of corporate players. Sectors like IT and consumer goods have underperformed, and there has been a downward revision in earnings estimates.
Global market attractiveness: Although India has been the choice investment destination, recent trends in other emerging economies, most notably China, have diverted investor interest. The Hang Seng Index has jumped 36 percent, positioning it as a more desirable substitute for foreign funds.
US Federal Reserve policy: The interest rate of the US Federal Reserve has also been a factor. As inflation has appeared likely to persist, hopes for extended higher interest rates have pushed investors into transferring money from emerging markets into secure US Treasury bonds.
Tariff Uncertainty: The impending uncertainty regarding reciprocal tariffs being advocated by the US has kept investors apprehensive. Although recent developments suggest that such tariffs could be more calibrated than earlier proposed, investors are still tight-lipped.
The departure of foreign investors has created a ripple effect across different segments of the Indian stock market.
Large-cap stocks: The worst impact has been on large-cap stocks, particularly technology and financial stocks. Giants like Infosys, TCS, and HDFC Bank have witnessed their market capitalisation decline.
Mid and small caps: Though mid and small-cap stocks have mostly resisted because of heavy domestic interest, they remain susceptible should the trend persist.
Banking Sector: The banking industry, which has experienced record growth in lending, is also facing loan demand and credit quality.
Though the sell-off continues, there are some pointers to suggest that Dalal Street's bull run is yet to come to an end.
Domestic Institutional Investor (DII) support: Although FPIs have been net sellers, domestic institutions, such as mutual funds and insurance companies, have come in to cushion some of the selling pressure. DIIs have been net buyers over the last few months, playing a vital supporting role in the market.
Attractive valuations: With the stock price correction, the valuations have turned attractive, and long-term investors are showing fresh buying interest.
Government policy initiatives: The Indian government has been forward-looking in achieving economic stability via policy initiatives. Incentives for production, infrastructure development, and digitalisation are still attracting India as an investment destination.
Indications of FPI resurgence: FIIs have become net buyers following the offloading of Rs 2.4 lakh crore of Indian equities since October. FIIs picked up shares worth Rs 7,470 crore in the last session alone.
Market revival: The Nifty rose by 4.26 percent during this week, its highest weekly increase since February 2021. The Midcap and Smallcap indices recorded even bigger comebacks, up by 7.74 percent and 8.64 percent, respectively. Dalal Street experienced yet another rally on Monday, March 24 as the Sensex rose more than 800 points above the 77,700 level and Nifty rose more than 200 points above 23,500, registering six successive winning days. The rally was spearheaded by bank, financial, and energy stocks as selling by FIIs eased and the market mood strengthened.
For retail investors, this translates into a change in sentiment, but the caution still prevails. The market is rising on hope, but danger lurks as April 2 draws near. HDFC Securities' Head of Prime Research Devarsh Vakil explains, "The second phase of President Donald Trump's trade tariffs on April 2 may be more calibrated than indicated earlier. US index futures are optimistic, and hopes are that the US President will be accommodative with tariffs."
The other big reason fuelling the rally is anticipation of a 25-bps cut in interest rates by the Reserve Bank of India in April. A weakening dollar and high foreign inflows have also boosted the rupee to 85.97 against the US dollar, its best two-and-a-half-month high.
The course of Dalal Street in the future will be influenced by many important factors:
Economic data: Future GDP and inflation figures will be key to investor sentiment.
Corporate earnings: If earnings are resilient, it may instill confidence in the market.
Global factors: US and Chinese developments will continue to drive FPI decisions.
Trade policies: How the US approaches mutual tariffs on April 1 will shape global market sentiment.
Although the recent foreign investor sell-off has caused some alarm, it is too early to announce the end of Dalal Street's bull run. Market corrections are an inevitable part of any bull cycle, and the fact there is robust domestic support, favourable valuations, and activist economic policies indicates that the market may stabilise over the next few months. Investors need to remain cautious and have a balanced strategy while riding the current volatility.