Bull Market Triggered by the Rally?

Investors stayed glued to their screens, hesitant to jump in, asking the all-important question after a 900-point single-day rally: “Was that finally the bottom?” But for those still watching from the sidelines, the bigger puzzle remains - is this just a fleeting rally, or are we witnessing the birth of a true bull run? Mandar Wagh explores the fine line between a short-term rally and a true bull run, drawing on past trends and assessing if the headwinds since October 2024 still persist. Could this rally be the beginning of something bigger? 

The market doesn’t ring a bell at the bottom and it certainly didn’t this time either. Ever since the Covid crash of 2020, Indian equities, especially the broader universe of mid and Small-Caps, have been on a largely upward journey. Barring a brief shake-up in 2022-23 during the Russia-Ukraine war and global jitters, there hadn’t been a meaningful correction—until recently. Fast forward to April 2025, by which time benchmark indices had tumbled over 15 per cent from the record highs reached in September 2024. Investors sat on the sidelines, watching, waiting, wondering - “Is this the bottom?” Then came the twist. Just when the mood was uncertain, the markets turned. In a swift rebound, the benchmarks soared over 10 per cent, catching most by surprise. Those who stayed invested or took the contrarian call to buy during the dip were smiling. Others, who waited for more clarity, watched the rally from the sidelines. It was yet another reminder that markets move before consensus forms. And by the time certainty arrives, the opportunity often doesn’t. One of the most persistent questions investors face is: “Is this just a short-lived rally or the beginning of a sustainable bull run?” The line between the two can often blur, but certain indicators can offer valuable clues. From macroeconomic signals to market breadth and liquidity trends, knowing what to watch and how to interpret it, can make all the difference. Let’s break it down and understand what truly separates a fleeting bounce from a long-term trend. 

History Speaks: What Follows a Drawdown?
To draw meaningful insights from the past, we analysed multiple historical drawdowns where the BSE Sensex declined by 15 per cent or more from its peak. For each instance, we examined the index’s performance over the subsequent 15 trading sessions, as well as the maximum single-day gain recorded during that recovery phase. 

Quick Comebacks Are Not Rare
History suggests that markets often bounce back sharply after deep corrections. In several past instances—such as July 1991, March 1990, and even as early as March 1986—the BSE Sensex delivered double-digit returns within just 15 trading sessions after hitting a drawdown low. These rebounds were not only swift but also powerful, offering quick gains to investors who either stayed put or bought into the weakness. The 24 per cent surge post the 1991 correction was particularly noteworthy, driven by historic economic reforms under the newly appointed Finance Minister Dr Manmohan Singh. Similarly, the market recovery in 1990 occurred as investor anxiety eased after the initial Gulf War jitters. 

Beware of Single-Day Spikes
Not every large one-day gain signals the start of a bull market. Take March 25, 1986, for instance—when the Sensex surged by a remarkable 9 per cent in a single day. However, the momentum failed to sustain in the following months. Despite witnessing rallies of over 10 per cent during 2010-2012, the market remained largely range-bound, lacking any sustained upward momentum. 

Similar one-day spikes witnessed in other years were often short-lived, driven largely by knee-jerk reactions to policy announcements or sudden shifts in market sentiment rather than structural changes. These quick moves can be fuelled by short-covering or speculative activity, and without broader support from fundamentals or liquidity, such rallies often lose steam. Hence, it’s important to view large daily gains with cautious optimism. 

Recent Market Behaviour Appears More Measured
Post 2010, the magnitude of short-term rebounds has noticeably cooled. The 15-day post-drawdown returns have largely ranged between 2 per cent and 6 per cent, indicating that markets may be evolving. Improved regulatory mechanisms, faster information flow, and algorithmic trading could be leading to quicker price discovery and more efficient absorption of bad news. Alternatively, this trend may also reflect growing investor caution, or that corrections are becoming shallower and less panic-driven. Either way, recent recoveries lack the explosive momentum of earlier decades— perhaps a sign of maturing markets. 

Lessons from June 2024
The market’s behaviour in early June 2024 served as a textbook example of how sentiment, political outcomes, and long-term fundamentals can collide to create dramatic market movements. In the days leading up to June 4, 2024, the day of the Lok Sabha election results, the Sensex rallied sharply, fuelled by expectations of political continuity and policy stability. Investors were seemingly pricing in a decisive win for the ruling coalition. However, markets were caught off guard when the actual results showed a slimmer-than-expected majority, raising concerns about potential policy hurdles and slower reforms. 

On June 4, the Sensex crashed sharply—plunging over 5 per cent in a single trading session, reflecting disappointment and uncertainty. Yet, what followed was equally dramatic. Within just three trading sessions, the market recovered to pre-result levels, showcasing the resilience of investor confidence. Over the next four months, the Sensex gained nearly 20 per cent, entering new high territory. Although the ruling alliance returned with a reduced mandate, investors took comfort in the continuity of key reform-oriented policies—particularly in infrastructure development, manufacturing through PLI schemes, and digital transformation initiatives. This policy clarity helped restore confidence swiftly. 

On the global front, cooling inflation in developed economies and growing expectations of interest rate cuts triggered a return of foreign capital into Indian markets. Meanwhile, domestic mutual fund inflows and record-high SIP contributions underscored the unwavering support from retail investors. While these factors initially powered a sharp market rebound, the rally eventually lost steam as India’s macroeconomic momentum began to wane. By late September 2024, investor sentiment turned cautious, triggering a sharp correction. This raises two critical questions: What factors acted as headwinds and dragged the markets lower? And more importantly, do these challenges still linger, or has the tide begun to turn? 

Inflation Eases, RBI Delivers
One of the most defining macroeconomic developments impacting Indian markets since October 2024 has been the sharp shift in retail inflation. In September 2024, the Consumer Price Index (CPI) inflation spiked to 5.49 per cent, crossing the Reserve Bank of India’s (RBI) upper tolerance band and rekindling fears of prolonged tight monetary policy. This elevated inflationary phase persisted through the OctoberDecember quarter, keeping rate cut hopes at bay and prompting caution among equity investors. 

However, the narrative began to shift meaningfully in early 2025. As food and fuel prices moderated and base effects kicked in, inflation began easing, eventually cooling to 3.16 per cent in April 2025 - its lowest reading since July 2019. This marked a critical inflection point. The sharp disinflation restored confidence in a favourable interest rate outlook and reenergized market sentiment, especially in interest rate-sensitive sectors such as real estate, auto, banking, and consumer durables. 

In a decisive move to bolster economic growth amid easing inflation, the RBI implemented two consecutive repo rate cuts in early 2025. The latest reduction of 25 basis points in April brought the benchmark rate down to 6 per cent, marking a cumulative 50 basis points decrease from the previous 6.50 per cent. The RBI's transition to an ‘accommodative’ stance signals its readiness to further ease monetary policy if necessary, aiming to stimulate lending, investment, and consumption across the economy. 

Industrial Output, Tax Revenues, and GDP on the Rise
Between September and December 2024, several global rating agencies revised India's GDP growth projections downward, reflecting concerns over both domestic and international economic challenges. India's GDP trajectory in FY24-25 reflects a resilient yet fluctuating growth pattern. The economy expanded by 6.5 per cent in the April-June quarter, showcasing a strong start to the fiscal year. However, growth momentum slowed in the July-September quarter to 5.6 per cent, amid global headwinds and uneven domestic demand. 

A recovery followed in the October-December quarter, with GDP rising 6.2 per cent, aided by improved consumption and festival-driven demand. For the January-March 2025 quarter, most analysts anticipate growth in the 6.4 per cent to 7.2 per cent range. India's manufacturing sector exhibited a modest yet encouraging rebound in March 2025, with the Index of Industrial Production (IIP) registering a 3 per cent growth. This uptick follows a revised 2.8 per cent growth in February, indicating a gradual recovery from a six-month low. 

India’s net direct tax collections for FY 2024-25 have shown strong momentum, rising by 13.57 per cent year-on-year to reach ₹22.26 lakh crore. This increase in tax revenues points to heightened consumer spending and industrial activity, contributing to the government's fiscal strength and enabling sustained public investment. The robust tax collections not only reflect economic resilience but also provide the government with greater fiscal space to support growth initiatives. 

The Earnings Engine Reignites
Indian equity markets experienced a noticeable phase of consolidation, marked by bouts of selling pressure and heightened volatility. This trend was primarily triggered by underwhelming corporate earnings and concerns over market overvaluation, especially after a strong rally in the first half of the fiscal year. In Q2FY25, several sectors reported weakerthan-expected earnings, with companies facing headwinds such as muted rural demand, rising input costs, and lingering effects of global economic uncertainty. 

The subdued earnings momentum carried into Q3FY25, despite the festive season which typically boosts sales. While some sectors like BFSI and IT showed resilience, overall earnings growth remained uneven and below consensus estimates. Compounding the situation was the concern over stretched valuations. Following the sharp market rally earlier in 2024, many stocks—particularly in the mid- and small-cap segments—were trading at multiples significantly above historical averages. 

The market optimism, driven by robust macro indicators and liquidity flows, had pushed valuations to levels that were difficult to justify against the earnings backdrop. This created a fragile environment, where any negative surprises or missed expectations acted as a trigger for profit-booking. As a result, investors—both domestic and foreign—began reassessing risk-reward dynamics, leading to portfolio rebalancing and selective exits, particularly from overheated segments. 

Following the subdued earnings seasons of Q2 and Q3, Q4FY25 marked a notable turnaround in financial performance for India Inc. Several sectors exhibited clear signs of recovery, with a significant shift in earnings momentum. The electrical equipment, pharmaceuticals, housing finance, and iron & steel sectors emerged as notable outperformers in Q4FY25, delivering robust double-digit growth in both revenue and profit. The IT, auto, and banking sectors stood out, with a substantial majority of companies posting positive profit growth. 

When the World Turned Back
Foreign Institutional Investor (FII) participation plays a pivotal role in shaping the trajectory of equity markets. FIIs are often considered a barometer of global investor sentiment and bring with them not just capital, but also credibility, market discipline, and liquidity. Their inflows can significantly boost market confidence, while their pullback can trigger sharp corrections. Despite strong and consistent inflows from domestic institutional investors (DIIs), including mutual funds and insurance companies, Indian markets witnessed selling pressure in late 2024 and early 2025, largely due to persistent FII outflows. 

Since March 2025, FIIs have begun showing renewed interest in Indian equities, marking a notable shift in sentiment after several months of sustained selling. This rebound in FII activity has been driven by a confluence of favourable global and domestic factors that have improved the risk-reward outlook for emerging market investments, particularly in India. One of the key catalysts has been the weakening of the U.S. dollar index, which typically encourages capital flows into emerging markets as returns in these economies become more attractive in relative terms. Additionally, India’s improving macroeconomic environment has played a crucial role in attracting foreign capital. 

RBI Opens the Taps
The RBI has taken a proactive stance in boosting systemic liquidity to support growth and maintain financial stability. Amid easing inflation and improving macroeconomic indicators, the RBI has adopted a more accommodative approach, not just through a policy rate cut but also via targeted liquidity-enhancing measures. In March 2025, the RBI executed net foreign exchange purchases totalling USD 14.4 billion. This strategic intervention was designed to stabilize the Indian rupee and inject liquidity into the banking sector. 

Complementing these efforts, the RBI announced plans to purchase government bonds worth ₹1.25 lakh crore through open market operations (OMOs) in May 2025. The RBI recently announced a record dividend payout of ₹2.69 lakh crore to the government for FY25. This robust transfer, significantly higher than previous years, is expected to bolster the government’s fiscal position and provide additional room for capital expenditure and welfare spending. 

Wider the Base, Stronger the Rally
A key indicator of a strong rally is healthy market breadth. Market breadth refers to the overall health of the stock market by measuring the number of stocks advancing versus declining. The number of stocks above the 20-day and 50-day moving averages is consistently high, reflecting growing short and medium-term bullish trends. For a stock market rally to be sustainable and fundamentally healthy, broad-based sector participation is crucial. 

When gains are concentrated in a handful of sectors—typically Large-Cap technology, banking, or select momentum-driven names—the rally becomes vulnerable to correction, as it lacks depth and resilience. In contrast, a market rally supported by a diverse range of sectors reflects genuine economic strength and widespread investor confidence. Broad sectoral participation indicates that growth is not confined to isolated pockets but is being driven by underlying macroeconomic improvements such as higher industrial output, better consumption trends, and increased capital expenditure. 

It also suggests that corporate earnings are improving across the board, not just in a few index-heavy stocks. This diversity reduces dependency on specific sectors and helps cushion the market against sharp downturns in any one area. During the recent rally from April 7 to May 15, 2025, the table highlights the strong performance across a broad range of sectoral indices, showcasing the rally’s diverse and widespread participation. 

Near Peaks, What’s Next? 

Q1FY26 Earnings as the Litmus Test 

As Indian equity markets hover near record highs, with just a 4-5 per cent upside needed to scale new peaks, the Q1FY26 corporate earnings season will play a pivotal role in shaping the market’s next move. With most macroeconomic and policy positives already factored in, investors will now look to earnings as the key driver. At current elevated valuations, strong topline and bottom-line growth is essential to justify market optimism. Any disappointment from index heavyweights could trigger volatility, while positive surprises may fuel the next leg of the rally. 

Beyond the numbers, management commentary on demand trends, margins, and forward guidance will be closely watched. Investors will pay particular attention to sectors such as banking, auto, capital goods, and IT for cues on consumption, credit growth, and global demand. Ultimately, Q1FY26 earnings will serve as a litmus test for whether corporate India can sustain the growth narrative—and whether the market can build further on its recent highs. 

Global Central Bank Policy 

Global central bank policies, particularly those of the U.S. Federal Reserve, play a crucial role in shaping investor sentiment and capital flows into emerging markets like India. The Federal Reserve’s decisions on interest rates directly influence global liquidity conditions—when the central bank signals a pause or potential rate cuts, it often leads to increased risk appetite among investors. This can result in higher foreign portfolio inflows into Indian equities, supporting market rallies. Conversely, aggressive rate hikes or a hawkish stance can tighten global liquidity, leading to capital outflows and market volatility. 

As the U.S. economy shows signs of slowing, markets are closely watching the central bank’s next moves for clues. In India too, the Monetary Policy Committee (MPC) of the RBI is expected to cut the repo rate by 25 basis points at its upcoming review in the first week of June, according to economists and market experts. Such a move could serve as a key growth catalyst by easing borrowing costs and supporting economic activity. 

Talks & Tariffs 

Global trade dynamics have historically played a pivotal role in influencing equity market sentiment. The imposition of steep tariffs on Chinese imports led to heightened global uncertainty, disrupted supply chains, and triggered significant corrections in equity markets worldwide. Investors feared a slowdown in global growth as major economies engaged in retaliatory trade measures. However, markets also responded positively to any signs of easing tensions. The 90-day pause on tariffs, followed by phases of negotiation and temporary agreements, brought relief rallies across global indices. 

These events highlighted how sensitive markets are to geopolitical and trade developments. India’s trade ties with the U.S. and China are also crucial. Being major trading partners, any improvement or disruption in these relationships impacts not just foreign trade flows, but also domestic sectors like IT, pharma, and manufacturing. In today’s interconnected world, stable and constructive trade agreements among leading economies act as key catalysts for market confidence and economic growth, making global trade policies a critical monitor for investors. 

Momentum in Capex Cycle 

India’s capital expenditure (capex) cycle has picked up significant momentum and is emerging as a powerful engine of economic and market growth. The government has taken the lead by sharply increasing its allocation towards infrastructure projects—especially in sectors like roads, railways, defence, and renewable energy. This public capex push has not only improved economic productivity but also created a ripple effect across industries. Encouragingly, private sector participation is now gaining traction as capacity utilisation levels rise and balance sheets strengthen. 

Companies across manufacturing, energy, and industrial sectors have started committing to fresh investments, supported by a stable policy environment and government production-linked incentive (PLI) schemes. The continued momentum in the capex cycle is expected to drive job creation, boost demand for capital goods and allied services, and eventually support corporate earnings growth. For equity markets, this trend is particularly bullish for sectors like capital goods, infrastructure, engineering, and construction, making it one of the most important structural drivers in the medium to long term. 

Conclusion
As we wrap up this story, one key insight stands out—investors often look for clear signals before embracing a market rally. However, markets rarely offer such clarity. Their dynamic nature means rallies often begin quietly, without ringing any alarm bells. While sharp rebounds following major corrections are not uncommon, investors should avoid being swayed solely by single-day surges or a few bullish sessions. The sustainability of any uptrend hinges on a broader set of factors. 

It's crucial to assess whether the issues that previously dragged the market down have genuinely faded. In India’s case, the correction phase that began in October 2024 was driven by weak corporate earnings, higher valuations, persistent FII outflows, and macro headwinds like high inflation, limited hope of rate cuts, and GDP downgrades by global agencies. Encouragingly, many of these pressures have now eased. With the tide turning, markets have staged a recovery. 

But to sustain this momentum, further catalysts are needed. Strong Q1FY26 earnings, potential RBI rate cuts, increased government capex, improved liquidity, and positive trade developments with the U.S. could provide the next leg of growth. While markets are inherently unpredictable, understanding the evolving backdrop will help investors judge whether the recent rally is fleeting—or the beginning of a more meaningful uptrend.