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Indian stock markets look forward to a potentially resilient yet volatile Vikram Samvat 2081, following a strong performance in Samvat 2080. In the past year, the BSE Sensex and NSE Nifty delivered robust returns of nearly 23% and 24%, respectively, marking record highs despite global uncertainties. However, as the new financial year unfolds, factors such as geopolitical tensions, valuation concerns, foreign outflows, and inflationary pressures may shape the market’s trajectory.
Entering Samvat 2081, analysts expect a measured market performance as several critical challenges loom. Foreign Institutional Investors (FIIs), who net bought Rs 86,928 crore in Indian equities during Samvat 2080, have recently pivoted towards cheaper markets in China and Japan, leading to October’s outflow of Rs 88,818 crore from Indian equities. As Chinese and Japanese equities offer more attractive valuations, FII flows into Indian markets could remain under pressure. The BSE Sensex’s and Nifty50’s trailing 12-month price-to-earnings (P/E) ratios stood at 24.1x and 23.7x, respectively, at the end of October 2024, reflecting high valuations relative to historical averages and potentially encouraging more profit-booking.
Corporate earnings growth, a critical factor for sustained investor confidence, has shown signs of deceleration. The recent earnings season reported subdued performance, with adjusted net profits of major companies growing just 5% year-on-year in Q2 FY25, considerably lower than last year’s 16% growth in the same period. This slower growth, if it continues, may hinder investor sentiment and trigger cautious market behavior in the coming quarters.
Geopolitical concerns
Geopolitical factors continue to pose risks to market stability. Tensions between Iran and Israel, alongside the prolonged Russia-Ukraine conflict, remain sources of concern, especially as potential escalations could disrupt global oil supplies and drive up oil prices. Elevated oil prices, coupled with higher vegetable prices due to uneven monsoon patterns, could place additional strain on India’s inflation trajectory. The Reserve Bank of India (RBI) may thus remain cautious with rate cuts, waiting for sustained inflationary ease to provide room for monetary easing—a delay that may dampen near-term growth expectations.
Despite these challenges, the Indian economy is projected to maintain robust fundamentals, with an anticipated real GDP growth rate of 7.2% for FY25, supported by recovering rural demand and stable urban spending. Although the RBI has suggested a slight downward revision to Q2 FY25 GDP estimates, optimism remains for H2 FY25 as investment activity gains traction. Furthermore, a recent correction has brought the Nifty’s forward P/E ratio closer to historical averages, suggesting valuations are not overly stretched, which could attract domestic investors and prevent significant downside risks.
In the upcoming Samvat 2081, market stability is expected overall, although volatility may emerge due to domestic and global factors, including India’s state elections, the US presidential election outcomes, and continued geopolitical risks. While earnings growth and monetary policy developments will be closely watched, the Indian markets enter the new year with a cautiously optimistic outlook.
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