For representative purposes.
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The story so far: For the sixth consecutive day, BSE Sensex closed lower on Wednesday reflective of a major sell-off among foreign institutional investors and portfolio investors (FIIs/FPIs), mixed earnings and apprehensions about the tightening of the (imports’) tariff regime in the U.S. The thirty-share BSE shed 122.52 points to close 0.16% lower at 76,171.08 points whilst Nifty50 shed 26.44 points to close 0.12% lower at 23,045.25 at close on Wednesday. Furthermore, the larger scheme of things has also triggered a rise in demand for treasury bonds as investors look for a haven.
Why is Trump affecting markets?
On Tuesday, U.S. President Donald Trump issued directives to restore tariff on steel and elevate the tariff on aluminium to 25%. The White House held these were to protect America’s industries which “have been harmed by unfair trade practices and global excess capacity”.
However, the directive was not well received in the Indian markets. This is primarily due to apprehensions about a potential dumping of Asian exports to India, potentially culminating into downward revision of prices and increased competition. Indian steel manufacturers are already amidst a revision in steel prices. For perspective, Indian manufacturer JSW Steel stated in its Q3 earnings about its Net Smelting Return (NSR) in India falling by close to ₹1,800 compared to the preceding quarter. Additionally, with respect to the alleged dumping, India’s Directorate General for Trade Remedies (DGTR) has an ongoing investigation into the imports of ‘non-alloy and alloy steel flat products’.
Why is foreign money moving away?
FIIs and FPIs have been increasingly moving towards U.S. bonds, seeking a haven away from the current modest Indian markets with potentially lesser returns. According to Devarsh Vakil, Head of Prime Research at HDFC Securities, the current situation in the market emanates from tepid domestic earnings growth, elevated valuations in mid and small cap segments, and persistent inflation exceeding the RBI’s lower threshold of 4%, and uncertainty around trade and tariffs. It is imperative to note here that bond yield and stock markets have an inverse relationship. This is because both vie for investor funds, aspiring to outdo the other by offering more returns. Therefore, when U.S. bond yield rises, foreign investors transit from Indian equities to U.S. bonds. Domestic, economic and political certainty alongside monetary policies are other contributing factors. All in all, the entire paradigm contributes to making the dollar stronger and the rupee weaker because of the flow of money.
V.K. Vijaykumar, Chief Investment Strategist at Geojit Financial observed that while the downturn in markets has been because of a combination of factors, the major among them has been the “relentless FII selling”. He told The Hindu about FIIs having sold in the cash market every day, except for two days, so far this year — totalling to ₹93,907 crore. He further noted that while domestic institutional investors have been compensating for the FII outflows, “market sentiments have been impacted.” In addition to this, Apurva Sheth, Head of Market Perspectives & Research at SAMCO Securities pointed out that dollar denominated returns of Indian equities “have not been impressive at all”.
Mid and small caps stocks are also experiencing a correction due to the sell-off spree. All contributing to a downward revision in valuation. According to Siddarth Bhamre, Head of Research at Asit C Mehta Investment Interrmediates, the correction here could be attributed to “liquidity finding its way out”. He explained, “Last year most of the money pumped by participants in equity MFs went into small and midcap funds. The correction now is leading to shift in investors strategy to move from small and mid-caps to large cap stocks and hence this severe underperformance.” Additionally, according to Geojit’s Chief Investment Strategist, mid and small cap valuations had (prior) reach “unsustainable levels”.
What is outlook for the near-term?
Tightening of trade policies with the probability of a trade war under Trump, geopolitical tensions and slowing global growth could influence markets going forward. According to Mr. Vijaykumar, “FIIs will return to India, only the timing is uncertain.” He further adds, “Indications of a growth and earnings recovery in India and dollar decline — we do not know when it will happen, will make FIIs buyers in India.” Additionally, Mr. Vakil holds that deep uncertainty about President Trump’s tariffs plans may keep investors on the “defensive”. As for the outflow, he contends SIP flows are likely to remain strong and should be able to absorb bulk of the selling.
Published – February 13, 2025 08:30 am IST
