Do it yourself

If social media posts are any guide to the popular sentiments, then definitely the Indian equity markets have frustrated even most seasoned investors. In particular, the young investors and traders who had their first tryst with the equity investing/trading are sounding completely disillusioned.

The seasoned investors who have experience of negotiating bear markets multiple times, are mostly frustrated due to the lack of adequate policy support and regulatory overbearance. In my view, insofar as the policy support (or lack of it) is concerned, it is mostly due to misplaced expectations and persistence denial of actual execution. The issue of regulatory overbearance is however a matter of debate.

However, the new class of investors is disillusioned for multiple reasons. First, many of them had committed to investing/trading as their preferred full-time occupation. After this severe market correction, their capital has materially depleted and their confidence is badly shaken. The worst part is that many of them appear clueless as to why the prices of the stocks they own are falling sharply; or why the technical analysis that was working so perfectly for the past four years has suddenly stopped yielding any results.

For the benefit of these investors/traders, I would like to highlight a few points that might help in a slightly better assessment of the current market situation.

FPI selling

This is the single most popular reason cited for the correction in stock prices. For record, as per final SEBI data, since 27 September 2025 (when Nifty 50 recorded its all-time high level of 26277) the foreign portfolio investors (FPIs), have net sold appx Rs2.6 trillion worth of Indian equities on stock exchanges. Adjusted for inflows in the primary market, this net sale number is appx Rs two trillion.

In this period, domestic institutions have net bought over Rs 2.75 trillion worth of equities in the secondary market alone.

The key points that the market participants are missing are—

·         The stock prices at any given point in time are determined by the forces of demand and supply. The net institutional buying (demand) has been positive on almost all days (except 5 days) since 27^th September.

·         Most of the damage has occurred in small and microcap stocks. FPI participation in this segment of the market is usually very low. On the other hand, the domestic mutual funds have the highest amount of asset undermanagement (AUM) in midcap and smallcap categories. Moreover, as per the latest available AMFI data, the retail participation is the highest in the midcap and smallcap categories. So technically, retail investors should be the strongest mover of prices of this category

So, blaming FPI selling for the fall in stock prices may not be justifiable.

Hike in capital gain tax

In the final budget for FY25, the finance minister hiked the long-term capital gains (LTCG) tax to 12.5% (from 10% previously) and short-term capital gains (STCG) tax to 20% (From 15% earlier). Almost every market participant on social media has cited this as one of the primary reasons for the underperformance of the Indian equities in the past 5 months.

In this context, it is important to note that—

·         In the budget for FY19 (presented on 1^st February 2018), the then finance minister had hiked the LTCG from 0% to 10%. After a small correction, one month later in March 2018, the benchmark Nifty was at the pre-budget level and 2x in 30 months (October 2021) despite pandemic related issues. FPIs net sold Rs530 billion worth of Indian equities (secondary market) in 2018, but bought Rs 1720 billion in the subsequent two years.

Obviously a 10x hike in LTCG neither hurt the stock markets nor prevented FPIs from pumping in huge money in the Indian equities. This time the hike is just 25%.

In my view, the reason for the current decline in stock prices is a combination of several factors. Some of these could be listed as follows:

Economic slowdown – the GDP growth is declining for the past few quarters and now appears to be settling in the 6-6.5% range. This is insufficient for sustaining the current level of government spending, which has been a primary driver of growth in the past few years.

Earnings slowdown – The corporate earnings that have been growing at a rate of 18-19% CAGR for the past four years (FY21-FY24), are peaking. FY25 earnings growth is expected to be in low single digits, while next couple of years the earnings are expected to grow at a rate of 10-14% CAGR. These estimates are also subject to downgrade. With lower economic and corporate growth, the European and Chinese equities with much cheaper valuations and stronger growth visibility (assuming peace deal between Russia and Ukraine) become relatively more attractive.

Liquidity squeeze – Covid-19 related fiscal and monetary stimulus resulted in abundant liquidity in the Indian financial system. At peak the banking system liquidity surplus exceeded Rs 10 trillion in September 2021. In April 2022, the RBI accelerated withdrawal of the surplus liquidity, resulting in the widest liquidity deficit of over Rs 3 trillion in January 2024. This massive liquidity squeeze, coupled with fiscal tightening (Fiscal deficit cut from 9.5% in FY21 to 4.8% in FY25RE), and persistent positive real rates have definitely resulted in lower leverage available to traders and punters in the equity markets. Moreover, the regulatory measures to curb excessive speculation (including stricter margin norms and enhanced surveillance measures) also removed a lot of froth from the market.

Unwinding of leverage of market participants and promoters (active in the market) is the primary reason for the fall in stock prices, not the hike in LTCG or selling of FPI.

Fortunately, the regular household flows (SIP and other wise) to the Indian equities have helped the domestic institutions to absorb all the FPI selling, unlike in 2000 and 2008 market falls. Besides, stronger regulatory measures that resulted in lower issuance of Participatory Notes (PNs) (a kind of derivative instrument on underlying Indian equity stock with obscure beneficial ownership), made sure that the selling was orderly and volatility did not spike. But for these two factors, we could have witnessed much sharper fall and higher volatility in the market, just like 2000 and 2008 when even the benchmark indices fell 10-15% in a single day.

If you are looking for reversal of trend in the market trend, look for a reversal in trends of growth, earnings and liquidity not FPIs flows; for FPI flows are effect not the cause.