Why Indian Stock Markets Are Facing Continuous Selling Pressures?

I believe during the last few days, you have heard the views of several marketmen, about the nosediving of domestic bourses. Here are my views on the issue:

🌼Weak Corporate Earnings: Recent Q2 results for Indian companies, particularly in the commodities sector, have missed expectations. Nifty's earnings per share (EPS) growth is now projected to dip below 10% for FY25, making current high valuations difficult to sustain at around 24 times FY25 earnings. This weak performance has raised concerns, especially given that current price-to-earnings ratios are elevated​​​​.

🌼Foreign Institutional Investor (FII) Outflows: FIIs have been selling off Indian stocks, reallocating funds to other global markets. Recent expectations of further Chinese economic stimulus, combined with attractive yields in the U.S., have redirected foreign capital out of India and toward other opportunities​​.

🌼Strengthening U.S. Dollar: The dollar's recent strength has contributed to this outflow, as it makes investments in U.S. assets more attractive and increases the cost of dollar-denominated imports for India. This affects sectors dependent on imports and puts added pressure on the rupee, leading to caution among investors​​.

🌼Falling Gold Prices: While typically a safe-haven asset, gold has seen price declines, partly due to a stronger dollar and lower global demand expectations. This has reduced gold’s appeal as a hedge, adding to the volatility in Indian equities as investors adjust portfolios amid shifting global conditions.

🌼Global Economic and Rate Uncertainty: While the U.S. Federal Reserve has paused rate hikes, high U.S. bond yields continue to make U.S. investments appealing. This has increased volatility globally, and India’s volatility index, the VIX, has surged 5%, reflecting heightened caution among investors​​.

🌼Inflation and RBI’s Dilemma: India is grappling with persistent inflation, which remains above the Reserve Bank of India’s target range. The RBI faces a dilemma between controlling inflation and supporting economic growth. While it has been reluctant to cut the repo rate, the risk of worsening inflation continues to limit the RBI’s ability to stimulate the economy through monetary policy. As inflation remains high, it creates uncertainty about future interest rate movements, which further discourages investment in riskier assets like equities​​​.

These combined factors—weak corporate earnings, FII outflows, a stronger U.S. dollar, falling gold prices, persistent inflation, and the RBI’s struggle with rate decisions—are creating a challenging environment for Indian stock markets. The uncertainty in both domestic and global markets is likely to keep the downward pressure on Indian equities in the near term. Photo: iStock.

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Falling Gold Prices and Impact on Indian Markets:

🌼Reduced Hedge Appeal: Gold is traditionally seen as a hedge against inflation and currency depreciation. With gold prices dropping, its appeal as a safe haven diminishes, leading to a shift in portfolio allocations. This adjustment has added to volatility in the Indian equity market, where many investors rely on gold's stability during uncertain times​​​​.

🌼Weakening of Gold-Linked Stocks: India is one of the world’s largest consumers of gold, particularly in sectors like jewelry and finance (e.g., NBFCs dealing in gold loans). A drop in gold prices affects the revenue and valuation of companies tied to gold, which in turn affects overall market sentiment and indices in which these companies are major players​​.

🌼Global Demand Fluctuations Reflecting Slower Growth: Falling gold prices are often an indicator of weaker global demand or economic slowdown, particularly from large markets like China. Lower demand expectations signal broader economic caution, affecting investor sentiment not just in commodity stocks but across the Indian market.

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Can Nifty Which Closed At 23532.70 Give a Bounce In The Short Term ?

Based on the recent analysis of Nifty and broader market sentiment, here’s a broader view of the current market situation:

🌼Current Market Trend: The Indian stock market, including Nifty, is facing significant selling pressure, which has led to a drop in index values. This trend is primarily attributed to the continued selling by Foreign Institutional Investors (FIIs), impacting the liquidity and overall sentiment​​​​.

Nifty’s Support Levels:

🌼Immediate Support: Nifty is approaching a crucial support level at the 200-day Exponential Moving Average (EMA), around 23,300-23,500. This level has historically acted as a strong support zone, and a rebound is expected here​​.

🌼Next Support: In case the 200 EMA breaks, the next support can be around 22,800-23,000, as suggested by several technical analysts. This range is supported by previous lows and Fibonacci retracements​​.

🌼Potential for Bounce: While there is a possibility of a short-term bounce around the 200 EMA, the ongoing selling pressure from FIIs and broader macroeconomic concerns, including global market volatility and weakening domestic sentiments, could limit the upside​​.

Additionally, key technical indicators like Moving Averages are showing a “neutral to sell” signal, which suggests that the overall momentum remains weak​​.

🌼Macro Factors: Despite a stronger US dollar, gold prices have been falling, which typically offers an opportunity for investors to shift to equities or risk assets, but the continued FII outflows may still dominate the direction for Indian equities.

Global factors like oil price fluctuations, Geopolitical Risks, recent US Fed Chairman, Jerome Powell’s comments about not rushing rate cuts, coupled with rising U.S. bond yields, may also weigh heavily on market sentiment​​​​, dampening the risk appetite globally including India.

In conclusion, while a short-term bounce could be possible, the broader trend remains cautious due to external pressures and ongoing domestic challenges. Investors should be prepared for further volatility in the coming weeks and should trim down their portfolios in every bounce.