Indian Stocks’ Worst Run in 29 Years, Wiping $1 Trillion in Wealth, May Yet Have Legs
Will the Selloff Continue?
The Indian stock market is experiencing its fifth consecutive month of losses, the longest streak since 1996, with investors and derivatives markets signaling that the pain may not be over yet. The Nifty 50 has fallen about 15% from its September peak, eroding nearly $1 trillion in investor wealth.
Why are Indian Stocks Struggling?
Weak earnings, persistent foreign outflows, and uncertainty surrounding U.S. tariffs have all contributed to the market’s woes. "In the current scenario of U.S. tariff uncertainty, Indian markets will struggle a bit more," said Mahesh Patil, Chief Investment Officer at Aditya Birla Sun Life Asset Management Company, which manages equity assets worth about $46 billion. While there may be brief rallies due to oversold conditions, "India will remain a sell-on-rise market for a few more months," Patil added.
What do Institutional Investors Think?
Foreign investors have sold Indian equities worth about $25 billion on a net basis since the end of September, with $4.1 billion in February. Local institutional investors, however, have remained net buyers due to strong retail interest, but inflows are slowing, according to Pratik Gupta, CEO of Kotak Institutional Equities. "Most local mutual funds, insurance, and portfolio management funds are seeing a slowdown in their equity inflows," he noted.
Small and Mid-Cap Stocks Feeling the Brunt
Small-cap and mid-cap stocks have been hit harder than large caps. In February, the Nifty small-cap 100 and mid-cap 100 indices plummeted 13.2% and 11.3%, respectively, bringing them 26% and 22% below their record highs last year. Flows are now shifting towards safer large-cap equity funds or balanced debt-equity funds compared to the rush to invest in small- and mid-cap funds till last year. "Selling pressure will continue to prevail in small-caps and mid-caps. Investors will stay away and wait and watch; there won’t be strong buying support in the next month or two," Patil emphasized.
Derivative Positioning Suggests More Losses Ahead
The derivative market is also signaling risk of further losses. High-net-worth individuals and retail investors have cut long positions, while foreign investors, although adding longs in stock futures, have hedged them with index shorts, according to data from IIFL Securities and Nuvama Alternative & Quantitative Research. Open interest (OI), which tracks outstanding futures contracts, has declined across both the Nifty 50 and the broader market, reflecting weak conviction among traders heading into March. With the 22,800 level now acting as resistance for the benchmark Nifty 50, analysts at both IIFL Securities and Nuvama expect further downside, with IIFL’s Sriram Velayudhan predicting a drop to 21,800 and Nuvama’s Abhilash Pagaria predicting the Nifty trading between 22,000 and 22,900 in March.
What Does the Future Hold?
While it may seem challenging to compare the current situation to past bear markets, it is essential to note that the Indian market has historically navigated such situations before. With the right strategy, adaptability, and a solid understanding of the market, investors can weather this downturn. As Patil noted, "The ability to ride out this market turbulence will depend on an investor’s risk tolerance, asset allocation, and the capacity to adjust to the changing market conditions." Ultimately, the key is to have a long-term perspective and stay focused on the fundamentals of the companies you invest in.
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