Opportunities Amid Market Challenges in 2025

The Indian equity market has started 2025 on a challenging note, reminiscent of the turbulent final quarter of 2024. Volatility remains elevated, and despite not so bad corporate earnings, the market continues its relentless decline, primarily due to selling by the foreign institutional investors (FIIs). Since the beginning of the year, no major equity index—whether broad-based or sectoral—has registered gains and all are trading in the red. This raises an important question: Will 2025 be even tougher for investors than the last quarter of 2024? 

To understand the current market sentiment, let’s revisit the start of 2024. At that time, several uncertainties loomed large. The Indian general elections created political instability, with concerns about the Narendra Modi-led government not securing a majority. FIIs withdrew nearly Rs 3 lakh crore, with a significant chunk exiting in the last quarter. Geopolitical tensions escalated. An earnings downgrade in the first half of FY25, driven by reduced economic activity during the election season and the impact of a severe heatwave, added to the strain. Infrastructure capex dropped by almost 13 per cent YoY in H1FY25 due to delayed project execution and subdued ordering activity. 

Yet, despite these headwinds, the broader markets delivered returns exceeding 20 per cent in 2024, with frontline indices also performing robustly, generating return in higher single digits. As 2025 unfolds, there are glimmers of hope. Geopolitical tensions, particularly between Israel and Hamas, are easing with the announcement of a ceasefire. A stable central government is in place, and economic activity has picked up as ordering activity has resumed across critical sectors like railways, power, defence, roads, and ports. A strong monsoon has replenished reservoirs to 75 per cent capacity (compared to a 63 per cent historical average), and the resulting 2.3 per cent rise in rabi output is likely to ease inflationary pressures especially food inflation. 

However, one challenge persists. FIIs remain net sellers, and this trend may continue in the near term due to uncertainties surrounding the USD index and unresolved tariff issues. Additionally, urban consumption in India has slowed, impacting demand and hence corporate earnings. The upcoming Union Budget for 2025–26 will be pivotal in shaping the near-term growth trajectory. It will be critical to watch for fiscal targets, capex plans, and measures to stimulate consumer demand. If Finance Minister Nirmala Sitharaman delivers, the central bank can take from there. 

On the monetary front, easing inflation could prompt the Reserve Bank of India (RBI) to adopt a more accommodative stance, potentially lowering the interest rates to spur consumption. While the current market scenario appears daunting, it also presents opportunities. As corporate profitability improves, fiscal clarity emerges, and consumer demand strengthens, FII flows could turn positive, drawn by India’s robust growth prospects compared to the other emerging markets. Also, the recent correction has eased some of the valuation concerns for these institutional investors. 

Investors should note that market recoveries take time. However, this doesn’t mean that opportunities are absent. For every market phase, there are sectors and stocks that align with the prevailing conditions. Our cover story in this issue delves into sectoral performance and the concept of sector rotation. We explore how different segments perform under varying economic conditions and provide insights on leveraging these trends to your advantage. As always, we welcome your thoughts and ideas—let’s navigate these markets together.

RAJESH V PADODE
Managing Director & Editor