Do it yourself

Financial Year 2024-25 (FY25), may be recorded in the annals of history as a watershed year for global politics, geopolitics, markets and the financial system. The events that occurred during the past twelve months have opened up significant possibilities for emergence of a new global order. Although the contours of the likely new global order are yet to begin taking a shape, it appears that fight for dominance over technology; endeavor to gain fiscal strength; interventionist democracy where the state exercises intensive control over citizens; and top priority to energy security would be four key characteristics of the new order.

The markets began to take cognizance of the broader developments and oscillated wildly between the extremes of greed and fear during the year. However, thankfully, markets managed to close the year on a rather satisfactory note. Most asset classes – equity, bonds, precious metals, base metals and real estate yielded decent returns for the year. Moreover, as we begin the new financial year (FY26), some of the key concerns, e.g., wider trade conflicts, geopolitical escalations, and fiscal implosions have peaked and showing some early signs of easing.

In India, the economic growth returned to the normal pre-Covid trajectory, as the base effect of FY20 and FY21 low growth tapered off, and external challenges mounted. Equity markets settled close to their long-term average valuations, after witnessing one round each of euphoria and despondency. Bond markets and INR have also managed to end the year on a rather optimistic note.

The following are some of the highlights of the performance during FY25.

Equity Markets

The Indian equity market managed to end the year in positive territory, despite showing negative in six out of twelve months. Indian equities underperformed the global peers. The benchmark Nifty yielded a return of ~5% (3% in USD terms), which was in line with the US markets (S&P500 +8%), and Europe (Stoxx600 +5%, DAX +21%) but much lower than China (Hang Seng +38%, Shanghai Composite +9%). Asian markets, ex China, were mostly negative, with Japan (Nikkei225 -10%), Indonesia (IDX-10%), Korea (KOSPI -10%) and Singapore (SET -15%) ending the year with decent cuts. The valuation premium of Indian markets to the other emerging markets therefore remained elevated.

Banks saved the day for Indian benchmark indices

The benchmark Nifty (+5.3%) performed in line with broader markets (NSE500 +5.4%, Smallcap 100 +5.4%); though midcap stock did somewhat better (Midcap100 +7.5%). The gains in benchmark indices were mostly led by banks (Nifty Bank +9.3%). Overall market cap of NSE was higher by 6.9%, explained by many new listings and outperformance of midcap stocks.

Sector-wise, Financials, Services, Private Banks, Pharma and Metals were top outperformers. Media, IT Services, PSU Banks, Realty, FMCG, Auto, Infra and Commodities were notable underperformers. Micro-sector-wise, Ship builders and EMS were outstanding. Renewable energy and real estate builders were notable losers.

2HFY25 witnessed 5/6 negative months

The benchmark Nifty50 yielded negative month-on-month (MoM) returns for five out of six months in FY25. The second half of the year was worst with five out of six months resulting in negative MoM return. However, the market breadth was negative in nine out of twelve months implying much higher volatility in the broader markets.

Institutional flows positive

Over institutional flows were materially positive for FY25. Net domestic and foreign flows in the secondary equity market amounted to Rs3591bn. Foreign Portfolio Investors (FPIs) were however net sellers of Rs2480bn in the secondary market, while domestic institutions pumped in a record Rs6071bn. FPIs were net sellers in eight out of the twelve months. The nifty-institutional flow correlation (73%) was decent in FY25.

Debt and Currency Markets

Indian debt and currency markets were volatile in tandem with the global trend. However, both bonds and INR managed to close the year on a buoyant note.

RBI cut the policy rates by 25bps and Cash Reserve Ratio for commercial banks by 50bps. The benchmark 10-year treasury bond yields eased to 6.58% from 7.11% a year earlier. USDINR weakened 2.6% to 85.59 from 83.35 a year earlier. Lending and term deposit rates were higher by up to 10-20bps. The yield curve shifted lower and flattened completely.

The RBI changed its policy stance to “neutral” from “withdrawal of accommodation” in FY24. The liquidity position however continued to remain tight, with banking system liquidity remaining in deficit for most part of the 2HFY25. The credit growth outstripped the deposit growth. Overnight and call money rates cooled 25bps in 4QFY25, due to aggressive open market operations carried out by the RBI.

Economic conditions

Overall FY25E GDP growth slowed down to ~6.2% as the effects of the low base of FY21 and FY22 tapered off and fiscal correction progressed further. The consensus estimates for FY26E GDP growth is slightly better at ~6.5%. Nominal GDP growth for FY25E has been materially lower at ~9.1%, and is expected to pick up to ~10.5% in FY26E.

·         CPI Inflation mostly remained within the RBI’s tolerance band of 4-6% (except for a short spike in October 2024). Core inflation eased below 4% in August and then February 2024.

·         Real rates have mostly remained in positive territory during FY24.

·         Fiscal deficit remained high despite moderation over the past few years.

·         The private sector investments failed to gather the desired pace, despite several government incentives. The government capex also slowed down in FY25. 9MFY25 investment to GDP ratio dropped to 32.6%. Private consumption recovered in FY25E from the sharp dip in FY24.

·         External conditions worsened during FY25. Merchandise trade balance deteriorated to USD292bn. Exports were lower yoy, while imports were higher by 6% yoy. External debt was higher by 10%. Net FDI flows continued to slow for the third consecutive year.

Commodities

FY25 was a mixed year for commodities. Precious metals (Gold +40%, Silver 39%) and Industrial metals (Zinc +17%, Copper +10%) recorded good gains, while energy (Brent Crude -17%, Coal -20%) and agri commodities (Wheat -16%, Soy -14%) ended the year with strong losses.

Crypto shine

Cryptocurrencies further strengthened their position with material rise in trading volumes and market capitalization. Bitcoin ended the year FY25 with a strong 21% yoy gain. More jurisdiction accepted cryptocurrencies as a valid medium of exchange, financial asset and/or tradeable asset.

In the past seven trading sessions, the benchmark Nifty 50 has managed to fully recoup the YTD2025 losses, soothing the ruffled feathers to a large extent. The broader markets have also regained some of the lost ground, though the midcap (-10% YTD2025) and small cap (-15% YTD2025) indices are still in the negative territory.

For the financial year 2024-2025, Nifty (+6.5%) has yielded a decent return, which is marginally lower than China (+12%), the US (+10%) and Europe (+9%), but much better than the other Asian peers like Indonesia (-11%), Japan (-6%) and South Korea (-5%). Broader markets in India are also positive FY25 (Midcap +8% and Smallcap +5%).

Now the question is “how does the market look from here?”. I shall deal with this question in some detail next week. However, to close this financial year, I must say this.

In my view, the collective wisdom of the market in India has appeared to have assimilated all the known events and anticipated developments regarding the economy and earnings, that could have sustainable impact on the stock prices. The market pendulum has tested both the extremes in the past seven months. A major surprise, positive or negative, or a black swan event, may only cause the market to breach these extremes in the next 6-8 months.

The most probable scenario for the next month is that the market swings get incrementally shorter in the next 9 months, as additional evidence of earnings recovery and improvement in the macroeconomic conditions emerges. We may also have more clarity on the global economic and geopolitical conditions in this period. In my assessment, for most of the time in the next 9 months, Nifty may oscillate between 22500-24500 (with occasional excursions outside this range) and find a sustainable pivot around 23500-24000 level.

A new market cycle might begin, once the market stabilizes around the equilibrium level and more credible assessments are available about the future earnings trajectory and macroeconomic growth and stability.

It was summer of 2013. The mood on the street was gloomy. The stock markets had not given any return for almost three years. USDINR had crashed 28% (from 53 to 68) in a matter of four months. GDP was on course to drop to 5.5% after growing at a rate of over 8% CAGR for almost a decade. Current account deficit had worsened to more than 6% of nominal GDP (the worst in decades). The Fx reserves of the country were down to US$277bn, sufficient to meet just 5 months of net imports. The confidence in the incumbent government had completely depleted. The people were on the street protesting against ‘corruption’ and ‘policy paralysis’.

The global economy had still not recovered from the shock of the global financial crisis (GFC). The thought of unwinding of monetary and fiscal stimulus provided in the wake of being unwound was unnerving most emerging markets ((Taper Tantrums), including India.

India, which was touted as TINA (There is no alternative) by the global investors just five years back and had become a key member of BRIC and G-20; was already downgraded to “fragile five” by some global analysts. This was the time when the government of the day took some brave decisions. One of these decisions was to appoint Mr. Raghuram Rajan, former Chief Economist and Director of Research at the IMF and then Chief Economic Advisor to the Government of India, as the 23^rd governor of the Reserve Bank of India (RBI). Mr. Rajan with the full support of then Finance Minister, P. Chidambaram, took several effective damage control measures, and was able to pull the economy and markets out of crisis within a short period of one year. USDINR gained over 11%, stocks markets recorded their all-time high levels, CAD improved to less than 1% of nominal GDP, real GDP growth recovered to ~7% (FY15).

The situation today is nowhere close to the summer of 2013. Nonetheless, the feeling is that we could potentially head to a similar situation in the summer of 2025.

Worsening external situation - rising global trade uncertainties due to the US unpredictable tariff policies, depleting Fx reserves, weakening USDINR, declining FDI and persistent FPI selling, pressure on the government to cut tariff protection for the domestic industry, and rising probability of a global slowdown.

Slowing domestic growth - Prospects of a poor Rabi crop aiding pressuring food inflation and RBI policy stance, crawling manufacturing growth, limited scope for any meaningful monetary or fiscal stimulus, etc are some of the factors that suggest the probability of any meaningful growth acceleration in the near term is unlikely.

Uninspiring policy response – The policy response to the economic slowdown and worsening of external situation is completely uninspiring so far. The measures taken by the government and RBI appear insufficient and suffer from adhocism.

For example, RBI has announced several liquidity enhancement measures in the past three months. These measures have been mostly neutralized by USD selling by RBI to protect USDINR and rise in the government balance with RBI (inability of the government to disburse money quickly to the states or spend otherwise. Risk weight cut for lending to NBFCs and MFI etc. is too little and too late. The damage to credit demand and asset quality in the unsecured segment is already done, and is not easily reversible.

The fiscal stimulus (tax cut on for individual taxpayers) could support the economy if at all, from 2H2025 only. There is a risk that the taxpayers in lower income segments (Rs 7 to 15 lacs) might use the tax savings to deleverage their balance sheets by repaying some of their high-cost personal loans etc. In that case this stimulus could have a negative multiplier on growth.

The short point is that (a) we are yet not in a crisis situation; (b) if not handled effectively and with a sense of urgency, the current situation may not take long to turn into a crisis.

The government, especially the finance minister and RBI, would need to urgently take several steps to take control of the situation and inspire confidence in the businesses and investors. Leaving it to the external developments, e.g., USD weakening due to falling bond yields in the US; energy prices easing due to Russia-Ukraine truce; trade normalcy restoration due to Sino-US trade agreement and normalization of Red Sea traffic; a plentiful monsoon easing domestic inflation; etc. may not be a great strategy - even if it works this time.

As they say – “it is great to have faith in God, but always lock your car”.

Indian equities have witnessed a decent correction in the past five months. The correction has been regular, deep and broad. As per the historical trends, in a regular market correction, the broader markets usually correct 1.5x to 2.5x relative to the benchmark indices. This trend seems to be sustaining in the ongoing correction also.

It is debatable how long and deep this correction would eventually be, there should be no doubt that the markets will find a floor and commence a fresh up move.

To estimate a bottom, we need to first assume whether the current correction is a usual bull cycle pull back or a bear market cycle.

·         In case of bull market corrections, Nifty50 usually corrects between 8%-15%, and fully retraces the lost ground in a maximum of 26 weeks from logging the bottom. In a complete bull market, the bottoms made during the intermittent corrections could be tested several times.

·         In case of a bear market cycle, the usual Nifty 50 corrections have been between 20%-35%. Once the bear market ends and a new bull market commences, Nifty50 takes between 35 to 70 weeks to fully retrace the lost ground and rises to a much higher level. The bottom made in a complete bear market is usually never tested again.

If we assume the current market fall to be a bull market correction, Nifty might bottom anywhere between 21900-22600 range and make a new high by the end of year 2025.

However, if we assume it to be a bear market cycle, Nifty may be far from hitting the rock. After a few zigzag (up and down) moves it may slide towards 20000 levels (or even lower) to form a cycle bottom. A sustained up move could start only after it hits the rock.

The trading and investment strategy for the next couple of years would depend upon what assumption an investor or trader makes.

If the assumption is that it is just a regular bull market retracement, the time to unwind short positions and take aggressive buy calls may be nearing. The risk reward over one year horizon may already be positive. The strategy in this case would be to use cash position for buying on every dip; hold good quality stocks regardless of the fall; and convert weaker stocks into stronger stocks regardless of the cost of acquisition.

If the assumption is that it is a bear market cycle, we may just be half way through the cycle. The risk reward over one year horizon may still be negative or neutral. Capital preservation should be the primary concern in this case. The strategy would, therefore, be to de-risk portfolio by (i) skewing the asset allocation towards debt and cash; (ii) using rise in prices to raise cash; (ii) avoid leverage completely; (iii) convert all low quality or high beta stocks to high quality or low beta stocks; and (iv) kill FOMO and let market to hit the rock and gain first 5%. Remember, a new bull cycle usually lasts 3-4 years and could yield substantial return.

As of this morning, there are strong arguments in favor or against both the assumptions. It is, therefore, the personal choice of individual investor/trader to choose one of these. Traders may also choose to reject both these assumptions and work with a daily or weekly technical view on the market. I am still in the process of gathering information to make a firm choice.

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.

In the past couple of days, some readers have uncharitably criticized me for being excessively paranoid; and some others have even accused me of fear mongering. It has been pointed out that I was writing the same stuff in the spring of 2022, while markets did much better in the subsequent two and a half years.

Though I need not respond to every criticism, I would take this opportunity to reiterate my view that the economic conditions in India started to worsen from FY23. Now it is reflecting conspicuously in data. The cyclical improvement in corporate earnings post Covid stimulus and unexpected onslaught of ‘revenge consumption’, was erroneously assumed to be a structural and durable earnings cycle. These erroneous assumptions have actually resulted in a valuation bubble; bursting of which shall cause more pain than timely realization of error and course correction would have.

Remember, over a longer period, stock prices do always converge with the economic realities. However, in the interim phase, stock prices may diverge and stay elevated for a much longer period than a rational mind would assume. But as Friedrich Nietzsche famously said, “The irrationality of a thing is no argument against its existence, rather a condition of it.”

Three consecutive years of superlative returns from the stock market does, in no way, change the fact that Nifty 50 has yielded a return of ~10% CAGR over the past 10 years and ~12% CAGR over the past twenty years. This return is the same or marginally lower than the growth in nominal GDP of India during these periods. In the past five decades, in no period of consecutive 10 years, stock market returns have exceeded the nominal GDP growth by 10%. Excess returns, if any, made in a period of 1-3 years, invariably get normalized over the next couple of years.

The question that everyone needs to honestly answer is “whether you bought stocks, or invest in a business?”

·         If you bought a stock, you were purely speculating about the likely demand and supply dynamics of the market over a near time horizon. You were not bothered about things like the economy and business then; and you should not be bothered about such things now. Stay true to your thesis and respect your risk appetite.

·         If you invested in a business; carefully assessing the intrinsic value and the future growth prospects of such a business, you should be focusing on the business and let the stock price converge to the business fundamentals in the due course. You should exit if your assumptions fail.

If you try to jump between these two boats midstream, you are certain to drown, regardless of your swimming skills.

How much more downside is left?

Under the current circumstances, it is common to hear, “This stock is down 50% from its recent highs. How much more could it fall?” I do not have any straight answer to this question. Actually, I believe that no valid answer exists for this question.

For example, at the close of the market on 12th February 2025 we could say that if the market sustains 22835 for two days and manages to close above 23110, we could see it going again to 23800 level. Else, it would fall to 22425 and then to 22070 level. However, if 4QFY25 results disappoint or February sales figures for auto and cement continue to remain sluggish we may see earnings downgrade and potential market de-rating as macro indicators are likely to remain weak.

If this does not make sense to you, well it actually does not.

The potential downside in a falling market and upside in a rising market are always daily rolling targets. Technical targets are usually conditional (e.g., “if market falls below this level, it could go to that level else…) and generally do not account for exceptional moves. Price targets based on fundamental valuation and historical discounting trends are dependent on materialization of a multitude of complex forecasts regarding likely revenue, profitability, cash flows, capex, project execution, policy environment etc.

As of this morning, the market price of 360/500 constituents of the NSE500 index is down 25% to 75% from recent high levels; the rest 140/500 are down 3% to 25%. If you ask me “how much more these stocks could fall?” I would say, “I do not know”.

Nonetheless, I may highlight, in the 2011-2013 period about 150 NSE500 stocks fell more than 95% from their recent high levels, and most of them could not recover their loss even after ten years. These were the stocks which fell 80% or more after first falling 75% from their recent high levels (from Rs.100 to Rs.25 and then to Rs5). I can just say that there is nothing to suggest that this could not happen again.

Little did Edward A. Murphy, Jr., an American aerospace engineer, realize that one of his design advice would become one of most popular epigrams and be termed Murphy’s Law. In the late 1940s, Murphys told his team that “If there are two or more ways to do something and one of those results in a catastrophe, then someone will do it that way.” This advice was later restated by Arthur Bloch in his book Murphy's Law, and Other Reasons Why Things Go WRONG as “Anything that can go wrong, will go wrong.”

In 1997 Sebastian Junger wrote a creative account of the 1991 ill-fated fishing expedition of the boat Andrea Gail from Massachusetts. The boat was caught in a severe sea storm and all the six crew members were reported dead. The book, titled “The Perfect Storm”, was later adapted into a movie with the same title. ‘The Perfect Storm’ is one of the perfect examples of Murphy's law applying in real life situations.

As of this morning, the Indian equity markets appear heading into a perfect storm. Anything that can go wrong appears to be going wrong. Let’s pray Murphy fails this time.

Economy stuck in slow lane

The broader economic growth momentum has stalled, completely negating the impact of the massive Covid stimulus. After a couple of years of denial, most agencies are gradually acknowledging that the real GDP growth might be settling in the 6%-6.5% band. As the latest Union Budget depicts, the fiscal leverage to stimulate growth has now mostly dissipated.

It is worth noting that FY26BE fiscal deficit of 4.4% may appear encouraging in recent context, but is far higher than pre Covid FRBMA mid-term target. Besides, as per FY26BE interest payments are projected to be 37.2% of total revenue receipts (vs ~23% in FY18RE). Obviously, the present debt and deficit levels are not sustainable.

For record, FY19BE projected fiscal deficit at 3.3%; to be cut to 3% of GDP by FY21. If the government aims to achieve this target by FY29, there would be hardly any fiscal leverage available to the government for increasing expenditure.

The central government capex, as percentage of GDP, may have already peaked around 3% of GDP. Even taking into account the state level capex, the total public capex is now stuck at 4%-4.5% of GDP, with significant risk of slippages due to resource constraints and execution failure.

The scope for increasing government consumption (revenue expenditure) is limited and would depend entirely on the tax buoyancy. The finance minister has assumed an income tax buoyancy of 1.4 in her estimates for FY26BE. This implies the government expects 1.4% rise in personal income tax revenue for every 1% rise in GDP. Even the STT collections, which are entirely a function of stock market trading volumes & MF flows, are assumed to be growing 41.8% in FY26.

Even with these aggressive tax revenue assumptions, government revenue expenditure (ex-interest) is expected to settle around 5% of GDP, much lower than ~7.5% seen during pre-Covid years.

Aggressive tax buoyancy assumptions, despite exempting personal income upto Rs12 lacs from income tax, indicate continued pressure on the upper middle-class segment consumption. This is the segment which has provided material boost to consumption growth, especially in the premium segments like SUVs, premium liquor, travel & tourism, clothing etc.

Despite all the efforts and incentives, private capex for new capacity addition has not picked up. Most private capex in the past five year has been in technology (improving productivity), real estate accumulation, brown field expansions, and consolidation through merger and acquisitions. There have been only a handful of greenfield manufacturing projects. Consequently, the share of manufacturing in GDP has not improved (in fact declined marginally). With sub-optimal consumption demand, positive real rates, and global headwinds on exports, the visibility of any material pick-up in the private capex remains low.

Thus, all the macro drivers of growth (consumption, investments, exports) are facing headwinds. At this point in time, it appears unlikely that in the next 4-5 quarters we shall witness any substantial improvements in most of the growth drivers. However, if the Mother Nature gets angry (a hotter winter, just like the warmer winter this time); or the ongoing global trade war triggered by President Trump gets uglier, the things could worsen further and we may witness growth trajectory collapsing further to pre Covid trajectory of 5-5.5%.

Corporate earnings fatigued

After compounding at a rate of ~18% over five years (FY20-FY24), the corporate earnings appear fatigued. Nifty50 FY25E earnings are expected to grow at a meager 2%-3%. As per the current consensus estimates, FY26E Nifty 50 EPS may grow ~12-13% yoy. However, given the macro headwinds, INR weakness, tariff headwinds for exports, persisting slowness in consumption demand, indicate some downside risk to the current consensus estimates.

The earnings growth in the recent past particularly led by banking, commodities (metal & energy) and capital goods & construction sectors.

Recent performance of the banks indicates that the growth drivers are now tired. Asset quality has peaked for most banks. Any further slowdown in the economy may actually trigger a reversal. Some segments like microfinance, unsecured personal loans and gold loans etc. are reportedly already showing considerable deterioration. Beginning of rate cut cycle with emphasis on immediate transmission, indicates that net interest margins may also be closer to peak and might begin to stagnate or moderate from current levels. Rising stress on household balance sheets, slowing demand for automobile and other consumer discretionary items, and slower private capex growth may keep the credit growth under check. Any substantial improvement in earnings growth for the financial sector in the near term is unlikely.

The demand growth for building material, steel, and other metals has moderated in FY25. The management commentary indicates only moderate improvement in FY26 with continuing margin pressures, given low-capacity utilization and lack of pricing power. Durable tariff by the US, might result in EU and Chinese dumping in countries like India, further pressurizing the domestic prices.

Several mega infrastructure projects like expressway, airports, freight corridors etc. are nearing completion. The pipeline of large infrastructure projects is diminishing in size; and the focus is on completion of the stuck projects. The visibility of large contracts for construction companies, except in the power sector, is poor in FY26 at least.

It is important to note that a large part of stock price rise in the past four years has occurred due to PER re-rating in anticipation of strong earnings momentum. Lack of sustained earnings momentum might result in some PE derating also; while there is no case for a further PER rerating.

Overall, any material upgrade in earnings estimates and PER rerating looks unlikely. However, there is a decent probability of earnings slowdown and PER derating persisting through FY26.

Technical indicators pointing to further downside

With a material erosion in stock prices over the course of the past six months, the investors’ buoyancy has eroded to a large extent. The broader markets with over 20% correction from recent highs are already showing a bearish trend. Benchmark indices are down ~13% from their recent highs and are showing distinct technical weakness – trading below all key moving averages. The technical studies indicate 4-5% further downside from the current levels.

However, if the earnings deteriorate and global noise rises, the immediate technical support may break and markets may head for much lower.

The perfect storm

Deteriorating macro, global headwinds, stagnating earnings growth and PER derating, and weak technical positioning could forma perfect storm for the Indian equities. Murphy’s law says it is more likely to happen. Let’s pray Murphy fails this time.

In the past two weeks, three key economic events took place in India. These events aim to provide material fiscal and monetary stimulus to the economy.

Presently, the total market capitalization of the NSE is close to Rs415 trillion, almost the same as it was during the last week of May 2024. The benchmark indices like Nifty 50, Small Cap 100, Nifty 500, Bank Nifty etc. are also trading almost at the same levels as prevailed during the last week of May 2024.