India’s key stock indices took a significant hit on Friday, capping off a volatile trading week that saw markets sentiment roiled by escalating geopolitical tensions and shifts in foreign investment.
The NSE Nifty dropped 235.5 points, or 0.9%, to close at 25,014.6, while the BSE Sensex declined by 808.65 points, or 1%, ending the day at 81,688.45. This marks the fifth consecutive session of losses, leading to a weekly decline of nearly 4.5%, the steepest fall since June 2022. The drop has wiped out a staggering ₹16.68 lakh crore in market wealth.
Global Tensions and Capital Outflows Drive the Decline
The week’s losses were primarily driven by increasing risk-off sentiment triggered by rising tensions between Israel and Iran. This uncertainty, coupled with renewed interest in Chinese stocks, led to a sharp reduction in appetite for Indian equities, further pressuring the market.
Sunny Agrawal, head of research at SBI Caps Securities, noted, “The market fall this week is due to the uncertainty around the escalation of tension between Israel and Iran, along with foreign money, especially from emerging markets ETFs, moving to China. The recent risk-off sentiment has led to an aggressive sell-off from foreign investors.”
Indeed, foreign investors sold shares worth ₹9,897 crore on Friday alone, bringing the week’s total to ₹37,000 crore—the largest weekly sell-off in recent months. This comes in stark contrast to the ₹35,575 crore foreign investment India saw in September, demonstrating a dramatic reversal in capital flows. On the other hand, domestic institutional investors stepped in, purchasing ₹8,905 crore worth of shares on Friday, with total inflows for the week amounting to ₹33,135 crore.
Market Outlook: Further Declines Expected
Analysts are bracing for further declines in Indian equities. With the Nifty nearing key support levels between 24,500 and 24,700, some believe there could be an opportunity for investors to start accumulating stocks, depending on how the geopolitical situation in West Asia evolves. However, Joseph Thomas, head of research at Emkay Wealth Management, warned of a possible 6-7% correction in the Indian market, driven by a combination of stretched valuations and potential volatility in the US markets.
Oil Prices Surge on Geopolitical Risks
The tensions between Israel and Iran have also had a significant impact on global oil prices. Brent crude futures climbed by 1.4% on Friday, closing at $78.7 per barrel. The increase followed US President Joe Biden’s statement that the US was in discussions with Israel regarding potential strikes on Iran’s oil infrastructure. This raises concerns over a broader conflict that could disrupt global oil supplies, particularly if Iran retaliates by targeting US military facilities in the Gulf or by closing the Strait of Hormuz, a critical chokepoint for global oil shipments.
Jefferies’ global strategist Chris Wood highlighted the potential ramifications for financial markets, advising investors to maintain exposure to energy and gold, given the rising uncertainty. “These are clearly developments which financial markets could not ignore,” he said.
China’s Rally and Asian Markets
Adding to the pressure on Indian stocks was a notable rally in Chinese markets, fueled by Beijing’s recent stimulus announcements. The CSI 300 index surged over 25% in just 10 days. Although Chinese markets were closed for the Golden Week holiday, they are expected to resume their upward momentum once trading resumes.
However, some analysts caution that China’s recent rally may not have lasting power. Joseph Thomas noted, “Chinese fundamentals are not strong enough yet as basic economic growth is expected to remain more or less sub-5%. The present momentum may not be sustainable over the medium to long term, despite the small doses of policy easing by the Bank of China.”
Other Asian markets showed mixed performances, with Hong Kong’s index rising 2.8%, while Japan gained 0.2% and South Korea added 0.3%. Taiwan, on the other hand, saw a slight decline of 0.4%.
Volatility Remains Elevated
The market’s fear gauge, the Volatility Index (VIX), surged by 7.3% to 14.13, reflecting traders’ concerns about further near-term risks. The index has gained 19% over the past week, underscoring the heightened uncertainty investors are grappling with.
Mid-cap and small-cap stocks also bore the brunt of the market downturn. The Nifty Midcap 150 and Nifty Small-cap 250 indices both dropped 0.9% on Friday, with the mid-cap index falling 2.9% for the week and the small-cap index declining by 2.1%.
Expert Insights for October: Market Dynamics Expected to Shift
The Indian stock market delivered a robust performance in September, buoyed by strong liquidity from both domestic institutional investors (DIIs) and foreign institutional investors (FIIs). However, as we move into October, market experts foresee a potential shift in dynamics, driven by global factors and sector-specific developments.
Siddarth Bhamre, head of institutional research and president at Asit C Mehta, highlighted the influence of global events on the market. According to him, “the initiation of interest rate cuts by the U.S. Fed and the stimulus package for the Chinese economy have reignited interest in global markets, particularly China.” This renewed focus on China could lead to a reallocation of funds, with Indian markets possibly taking a backseat as China’s economy gains momentum.
Despite this, Bhamre remains optimistic about India’s stock market resilience, though he anticipates sectoral shifts. He warned that the auto sector might face a slowdown due to rising inventory levels, even during the typically strong festive season. On the other hand, defensive sectors such as FMCG and pharmaceuticals could offer safer investment avenues due to their stable valuations. Banking stocks, meanwhile, may become more selective plays, as challenges in deposit mobilization impact growth in the sector.
Similarly, DP Singh, joint chief executive officer of SBI Mutual Fund, pointed to a “defensive shift” in equity markets. He noted that sectors like consumer goods, technology, and healthcare are starting to outperform cyclical sectors like capital goods, real estate, and PSUs. Singh emphasized the importance of a discerning approach to stock selection, advising investors to focus on companies with strong fundamentals, consistent earnings growth, and sustainable cash flows. He also suggested hybrid funds as a strategy for those seeking to manage market volatility, especially for investors waiting for potential corrections.
Rahul Ghose, chief executive officer of Hedged.in, adopted a positive outlook on the non-banking financial company (NBFC) sector. He believes the sector could benefit from ongoing global rate cuts, providing a favorable environment for growth. Ghose also highlighted consumption-oriented stocks such as D-Mart and Titan as promising investments, given their strong earnings performance and the rising disposable income of consumers.
Snapshot
As October unfolds, market participants should keep an eye on global developments and shifting sectoral trends. While opportunities remain, experts recommend a more cautious and selective approach to navigating the evolving landscape.
The Indian stock market may experience slower growth in the coming month and certain defensive and consumption-oriented sectors could present attractive opportunities for investors.
