Indian Stocks Facing Significant Decline Amid Global Fund Withdrawals

The Indian stock market is currently experiencing a substantial downturn, on track to record its worst monthly losses since March 2020 due to significant sell-offs by foreign investors. This ongoing trend has sparked debates among analysts regarding the underlying causes of this market correction.

Since an impressive rally during the first half of this year, foreign investors have persistently withdrawn funds from Indian stocks throughout October, rendering it the focal point for outflows compared to other Asian markets.

Data from the National Stock Exchange reveals that global funds have divested over ₹1.11 lakh crore in the last 20 trading sessions alone, accumulating a staggering total of more than ₹1 lakh crore in outflows for the month.

As a result, India's benchmark indices—the NSE Nifty 50 and BSE Sensex—have experienced drops of approximately 6.01% and 6%, respectively, marking their steepest declines since the Covid-19 induced market turmoil in March 2020.

Despite the heavy selling pressure from foreign investors, retail and domestic investors have played a significant role in preventing further market declines in the $5.25 trillion stock market. Domestic institutions have invested about ₹97,000 crore in stocks this month, thereby countering the massive foreign sell-off.

While the Nifty index has corrected by 8.3% from its recent peak, mid-cap and small-cap segments have fared even worse, witnessing corrections of 9.8% and 9.3%, respectively. The mid-cap and small-cap segments have displayed severe volatility, with numerous stocks experiencing declines exceeding 30%, and some even dropping by over 40%, according to VK Vijayakumar, chief investment strategist at Geojit Financial Services. "Many large caps, however, have remained stable amidst this market turbulence," he noted.

Analysts have cited several factors contributing to this month's foreign institutional investor (FII) exodus, including a perceived shift of investment focus from India to China, slowing economic growth, and rising U.S. interest rates. Nonetheless, the primary reason remains a topic of contention and debate.

Rajiv Batra, head of strategy for Southeast Asia at JPMorgan, cautioned bear traders, suggesting that "a sizable amount of correction is over." He indicated that fears about money transitioning from India to China may be misguided, further pointing to uncertainty related to the U.S. elections influencing a shift towards dollar-denominated assets. He expressed confidence that India’s long-term prospects remain favorable.

There are still structural and cyclical investment opportunities in India, particularly in sectors associated with power and capital markets. However, Manav Chopra, director and technical analyst at Nuvama Institutional Equities, suggested there may not be any sectors achieving new highs soon. He projected that the Nifty might struggle to surpass the 25,000-25,300 mark in the medium term, predicting further corrections within the capital goods sector.

The sectors most impacted include Nifty Oil & Gas and Nifty Auto, both of which have declined over 12% this month. Other sectors like Nifty FMCG and Nifty Realty have followed suit, each experiencing declines over 10%. Surprisingly, the Nifty IT index has shown resilience, registering only minor decreases this October.

This wave of outflows coincides with China's stimulus measures aimed at reviving its economy, which include interest rate cuts and increased local government spending. However, Rajesh Bhatia, chief investment officer at ITI Asset Management, contends that these actions are not the primary driver behind FII selling. He emphasized that many companies are reporting disappointing results in the current market context, making the situation even more challenging.

Bhatia identified rising U.S. interest rates as the main catalyst for the ongoing selling pressure from FIIs. Goldman Sachs has recently adjusted its outlook on domestic stocks from "overweight" to "neutral" in its emerging markets allocation, citing slow economic growth and declining corporate profits as contributing factors. Likewise, Bernstein Research has expressed concerns about local stocks, describing the market as "quite vulnerable" in the near term.

Concerns about a slowing economy are further amplified by a decrease in tax collection, which fell to a 40-month low, reflecting sluggish growth in the gross goods and services tax. Additionally, recent data indicates declining output growth across eight core sectors.

Stock Market Update:

The Nifty and Sensex indices have risen over 1% recently as share prices of companies like ICICI Bank and Mahindra & Mahindra gained traction.

Stocks, Market, Economy