Positive Developments, Negative Mood

Despite significant tax relief, a slowdown in inflation, and an interest rate cut by the RBI, nothing has managed to lift the mood of the Indian markets. What’s weighing on the minds of FIIs? 

The New Income Tax Bill 2025 was tabled in the Lok Sabha after Finance Minister Nirmala Sitharaman proposed complete Income Tax exemption for individuals earning up to ₹12 lakhs annually. In other developments, India’s retail inflation cooled down to a five-month low of 4.31 per cent in January, down from 5.22 per cent in December, driven by a slowdown in food price inflation. The Reserve Bank of India (RBI) has finally lowered its key interest rate for the first time in nearly five years, aiming to revive the sluggish economy as inflation trends towards its target range.

The Monetary Policy Committee (MPC) reduced the repo rate by 25 basis points to 6.25 per cent after holding it steady for 11 consecutive policy meetings. Despite these positive developments, the Indian markets appeared largely unimpressed. After a strong recovery ahead of the Union Budget, the markets faced renewed pressure, with benchmark indices falling for eight consecutive trading sessions over the past fortnight. Foreign institutional investors (FIIs) remained net sellers during the fortnight, offloading equities worth around ₹27,900 crore. Investor sentiment remained deeply bearish as the thirdquarter earnings for FY25 fell short of expectations.

Among the companies that have reported Q3FY25 results so far, nearly 55 per cent posted positive profit growth, while the rest witnessed a decline. Aggregate revenue growth remained modest at 5.5 per cent, with operating profit expanding by 9.5 per cent. Despite recent corrections, Indian equities continue to trade at elevated valuations, with Mid-Cap and Small-Cap indices holding price-to-earnings (PE) ratios significantly above their historical averages. As a result, the BSE Sensex and Nifty 50 declined by around 2-3 per cent over the last two weeks, extending their overall correction to 13-14 per cent from the record highs reached in September 2024.

The broader markets experienced even sharper selling pressure, dragging the BSE Mid-Cap and BSE Small-Cap indices down by 22-24 per cent from their 52-week highs. All the sectoral indices ended the fortnight in red territory, with real estate, fast-moving consumer goods and power stocks taking the biggest hit. However, banking and metal stocks, which had already faced significant corrections, witnessed relatively lower selling pressure.

Among external factors, market volatility escalated following US President Donald Trump’s announcement of new tariffs, particularly on steel and aluminium imports. The move has reignited fears of a trade war, raising concerns over its potential impact on global economic growth and trade dynamics. One thing is clear—how much further the markets will fall remains uncertain at this point. Stay tuned for further updates.