The Indian stock market has become the first major stock market to completely erase all the losses incurred in the market crash following President Donald Trump’s imposition of reciprocal tariffs on April 2. The Nifty50 is now above the pre-April 2nd level. The S&P 500, Nasdaq, Hang Seng, Shanghai Composite, and Euro Stoxx 50 are all below the pre-April 2nd levels. India’s outperformance clearly stands out.
FPIs changing their strategy?
FPIs, who have been sustained sellers in India for many months, bought stocks for ₹14,670 crore in the last three trading days. This change in FPI strategy from sustained sellers to aggressive buyers is likely to continue in the changed circumstances.
What has changed?
The dollar has steadily appreciated after Donald Trump’s victory in the US presidential elections. This encouraged FPIs to continuously sell in other markets – both developed and emerging – and move the money to the US.
Since the Chinese stocks had become cheap, the “sell India, buy China” strategy also played out, aggravating the FPI selling in India. This market construct has changed now.
The uncertainty surrounding President Trump’s incoherent tariff policy continues. We don’t know how this chaotic trade scene will evolve. However, some consequences, like the following, appear inevitable:
(i) The dollar has weakened from the recent peak of 110 in mid-January 2025 to about 99 now, and in the context of the capital flight away from the US, the greenback is likely to remain weak. This is favourable for capital flows to emerging markets.
(ii) The two worst-hit economies in 2025 are likely to be the US and China. In the best-case scenario for 2025, the US’s growth will be less than 1 per cent, and China’s growth is now projected at around 3.5 per cent. India’s domestic consumption-driven economy can grow at 6 per cent in FY26 even in a scenario of slowing global growth.
(iii) On 14 April, the WSJ reported, quoting US Treasury Secretary Scot Bessent, that the US will prioritise trade deals first with five allies – the UK, Japan, Australia, South Korea and India. The US administration treats India as an ally for prioritising a trade deal.
(iv) India’s macros are in a sweet spot. The fiscal and CADs are under control and, more importantly, CPI inflation has been steadily coming down to touch 3.34 per cent in March. This is well within the RBI’s comfort zone of 4 per cent. RBI’s shift to an accommodative monetary policy indicates more rate cuts to come. Three more rate cuts of 25 bp each are likely in this rate-cutting cycle.
(v) This monetary stimulus and the fiscal stimulus provided in the 2025 Budget through big income tax cuts can ensure 6 per cent GDP growth in FY26. India can turn out to be a preferred destination for FPIS since most other emerging markets have a much higher export-to-GDP ratio to the US and, therefore, are more vulnerable to a growth slowdown.
Markets can surprise on the upside
Increasing FPI inflows into India in the context of India’s improving macros can take the market higher.
Many stocks in the domestic consumption sectors are already at record highs, even though the Nifty is now around 10 per cent below September 2024 highs.
It is true that the Nifty is trading at 20 times FY26 estimated earnings, which does not comfort the market’s valuation. However, sustained fund flows can raise valuations.
Sustained rally will be constrained by modest earnings growth
Even though the market can surprise on the upside, a sustained rally would be constrained by the modest earnings growth in FY25. From FY22 to FY24, the rally was supported by a 20 per cent average earnings growth. In FY25, earnings dipped to around 5 per cent. Recovery in earnings to around 12 per cent is on the cards in FY26. Sustained earnings recovery is necessary for the market rally to gather momentum.
Prioritise domestic consumption themes
IT will be under pressure in the context of the slowdown in US growth. However, midcap IT can be bought at lower valuations. Domestic consumption themes like financials, telecom, hotels, aviation, cement, and discretionary consumption like jewellery, autos, and healthcare will do well.
First published in Mint
