Summary of this article
Nifty 50 has fallen 8.75 per cent in eight straight weeks
Strong earnings and balance sheets could drive returns after the correction
Crude, US yields, rupee and RBI policy remain key market triggers
The Nifty 50 has registered its longest weekly losing streak in 25 years, falling for eight consecutive weeks and declining 8.75 per cent during the period of consistent correction. Investors have lost over Rs 28 lakh crore in wealth across the broader market during this period.
After eight weeks of losses, investors want to know how much further the market could fall and which stocks could deliver returns when it recovers.
Markets have often recovered after steep falls, but it is hard to tell when that will happen. This time, the fall has been driven by several factors, including global tensions, rising crude oil prices, higher US bond yields and heavy foreign investor selling.
India's limited share in the global artificial intelligence (AI) investment boom, uncertainty over US tariffs, the US-Israel-Iran conflict and rising crude oil prices have hurt market sentiment.
These factors have triggered heavy foreign portfolio investor (FPI) outflows from Indian equities. The impact has been bigger in dollar terms as the rupee has weakened sharply against the US dollar, reducing returns for overseas investors. On an year-to-date basis (YTD), rupee has weakened over 7 per cent against dollar.
The narrowing spread between Indian and US 10-year government bond yields has also reduced the relative attractiveness of Indian assets. With US yields hovering around 5.30 per cent, global investors have less incentive to take currency and emerging-market risks by investing in India.
FPIs sold a net Rs 35,861 crore from Indian equities in September, followed by Rs 9,232 crore on the first trading day of October, according to National Securities Depository (NSDL) data. This takes their total year-to-date outflows to Rs 2.69 lakh crore.
Where Can Investors Find Returns
After the correction, investors should focus on companies that can deliver earnings growth rather than simply bet on a broad market recovery.
Devender Singhal, senior fund manager at Kotak Mutual Fund, said India's fundamentals remain strong, supported by services activity, government spending, manufacturing and a positive investment cycle. He expects infrastructure, defence and industrial companies to benefit from healthy capex plans and strong order books.
While higher commodity and energy prices could pressure margins, Singhal expects rising volumes, operating leverage and better execution to support earnings. He sees financials, industrials, defence, capital goods and select consumption segments remaining relevant.
Singhal also expects earnings to improve in the second half of FY27 as companies move from weak earnings performance towards better delivery.
Utsav Verma, head of research at Choice Institutional Equities, said valuations have become more reasonable after the correction. The Nifty 50 and Nifty 500 are currently trading at a 13 per cent and 10 per cent discount to their long-term average price-to-equity (P-E) multiples, respectively.
The P-E ratio compares a company’s share price with its earnings per share and is commonly used to gauge how much investors are paying for each rupee of earnings. A lower P-E can indicate that valuations have become more reasonable, although it does not by itself mean a stock or index is cheap.
However, Verma said the market still faces challenges from higher-for-longer crude prices and rising bond yields in developed markets. Corporate earnings will be closely watched as higher raw material, fuel and freight costs begin to pass through.
"Crude basket cool off with some material resolution of West Asia crisis is the single most important monitorable which can get our outlook changed from challenging to less demanding," Verma said.
He expects stock-specific returns to become more important, with alpha increasingly driven by earnings delivery. "Our preference remains for fundamentally strong companies backed by structural policy support, favourable industry dynamics and visible earnings upgrades," he said.
What Could Bring Foreign Investors Back
A sustained recovery in Indian equities is likely to require an improvement in the global macro environment. Several indicators will be important for investors to track.
First is the Reserve Bank of India's (RBI) October policy. The RBI's stance on inflation, liquidity and the rupee could determine how investors assess India's interest-rate outlook. A Reuters poll showed nearly 60 per cent of economists expecting a 25-basis-point rate hike at the October 5–7 meeting, which would take the repo rate to 5.50 per cent.
Second is crude oil. Brent crude remaining above $100 a barrel could continue to pressure India's inflation, current account and corporate margins. A meaningful retreat in crude prices, particularly if accompanied by some resolution of the West Asia conflict, could provide a major relief to Indian equities.
Third is the US 10-year Treasury yield and the dollar index. A moderation in US yields would reduce the relative attractiveness of US fixed-income assets and could encourage flows back into emerging markets.
The rupee is another key factor to watch. The currency's reaction around the Rs 96-per-dollar level will be important for foreign investors as further depreciation could add to their dollar-denominated losses. The rupee closed at 96.32 per dollar on October 1.
India's PMI numbers, inflation, growth data and corporate earnings will also determine whether domestic fundamentals can offset the pressure from global markets.
Initial Public Offer (IPO) subscriptions and new listings could offer another signal. Foreign participation in India's primary market has remained comparatively resilient, and sustained interest in new issues could indicate that overseas investors are still willing to allocate capital to India despite the pressure in secondary markets.
US Jobs Data Offers Some Relief
There was some relief on the global rate front after the latest US jobs report showed a sharp slowdown in hiring.
The US economy added only 29,000 non-farm jobs in September, significantly below the roughly 90,000 expected by economists, while the unemployment rate rose to 4.2 per cent.
The weaker-than-expected labour market data has reduced expectations of an October Federal Reserve rate hike, potentially providing some relief to global bond yields and emerging-market assets.
For Indian equities, the key question is whether this translates into a sustained decline in US Treasury yields and a weaker dollar. If that happens, the pressure from one of the biggest current headwinds for foreign investors could ease.
However, the relief may not be immediate. Higher crude prices continue to pose an inflation risk, while the RBI itself is facing pressure to tighten monetary policy. Broadening inflation, resilient growth and global rate hikes are increasing the case for RBI tightening.
What To Watch Next Week
The RBI's Monetary Policy Committee meeting will be the biggest domestic event for the market next week. The meeting is scheduled from October 5 to 7, with the policy decision due on October 7.
A Reuters poll showed nearly 60 per cent of economists expecting a 25-basis-point rate hike, amid higher inflation, elevated crude prices and pressure on the rupee.
The market will therefore look beyond the rate decision itself and focus closely on the RBI's guidance on inflation, liquidity, the rupee and the possibility of further rate hikes.
