Navigating Market Volatility: Staying Grounded Amid the Swings

The equity market has been on a roller coaster ride. After hitting record highs in September, frontline indices fell by over 15 per cent over the following six months. However, in a sharp turnaround, the Nifty rebounded nearly 15 per cent in just the past month. This heightened volatility has left many of you puzzled and are struggling to make sense of such erratic movement of market. 

To gain clarity, it helps to take a step back and view the market through a long-term lens. One of the most fundamental drivers of equity performance is GDP growth. Historically, the broader equity market has tended to reflect a combination of a country’s real GDP growth and inflation. For example, from 1990 to 2023, India’s GDP grew at an average of 6.7 per cent annually, with inflation averaging around 5–6 per cent. During this period, the BSE Sensex delivered annualised returns of roughly 12 per cent, highlighting the close link between economic expansion and market performance.

Looking ahead, several institutions, including the Ministry of Statistics, IMF, World Bank, and ADB project India’s GDP growth to be in the range of 6.5–7 per cent for the coming year, with inflation expected to remain close to 4 per cent. This combination suggests that equity market returns of around 11 per cent could be achievable. Moreover, earnings estimates for FY26 and FY27 stand at 13 per cent and 15 per cent, respectively, reinforcing the positive outlook for corporate profitability and market performance

On the policy front, the government has rolled out measures aimed at boosting demand. Recent tax reliefs have put more disposable income in the hands of salaried individuals, likely fuelling consumption and investment. The expected implementation of the Eighth Pay Commission will further enhance the purchasing power of government employees, providing a lift to demand, especially in urban and semi-urban areas. Meanwhile, falling interest rates have reduced borrowing costs, making housing and consumer credit more attractive. These trends are complemented by the surge in gold prices, which has enhanced household wealth and encouraged discretionary spending.

Rural demand is also expected to pick up, aided by a favourable monsoon forecast that should support agricultural output. At the same time, falling crude oil prices are easing input costs for companies, improving margins and strengthening earnings. Adding to this positive momentum is the return of foreign institutional investors (FIIs) to Indian equities, signalling renewed global confidence after a period of net outflows until April 2025.

However, despite this encouraging backdrop, investors should not lose sight of key risks. Valuations, especially in small- and Mid-Cap stocks, remain elevated, and even Large-Caps appear pricey following the recent rally. Globally, several uncertainties persist, including high U.S. bond yields, rising Japanese interest rates, trade tensions, and the possibility of a further downgrade to the U.S. credit rating. These factors could disrupt global markets and reverse FII inflows.

In this environment, investors would do well to revisit their asset allocation. Diversification, not just across sectors, but across asset classes and valuation levels is essential. Avoid overexposure to overheated sectors such as PSUs and defence, which may be prone to corrections. Markets are never linear periods of consolidation and volatility are part of the journey.

India’s structural story remains strong. With a disciplined approach and informed decision-making, investors can navigate short-term noise and position themselves for long-term wealth creation.

RAJESH V PADODE
Managing Director & Editor