Navigating Volatility: Is It Time to Accumulate Indian Equities?

After a robust start to last week with a 3.8% rally in a single session, Indian equity markets have since witnessed a series of swings that left investors guessing about the near-term direction. The Nifty 50 briefly touched the 25,000 mark before slipping below 24,500, only to recover again, highlighting the prevailing indecision in the market.

This volatility has raised a pressing question for retail investors: Should they take profits or hold on for further gains?

Yield Spreads and Global Pressure

One of the major factors influencing recent market movement is the evolving global yield environment. The spread between 10-year bond yields in India and the US has narrowed to 165 basis points — a level not seen in more than 20 years. This has implications for capital flows, particularly from foreign institutional investors (FIIs), who are typically sensitive to relative yield dynamics.

A confluence of global factors is contributing to this compression. US Treasury yields have risen sharply, driven by persistent inflation concerns and downgrades in US credit ratings. Central banks across the globe are also reducing their exposure to US bonds, contributing to further upward pressure on yields. Meanwhile, Japan is experiencing its own set of challenges with rising yields amid economic uncertainty and weak exports.

In contrast, India’s consumer inflation has declined for the sixth straight month to 3.16% — its lowest level in six years. However, weakness in core sector growth, which slowed to just 0.5%, has revived expectations of further rate cuts from the Reserve Bank of India. With domestic growth concerns rising and inflation cooling, policymakers may adopt a more accommodative stance in the coming quarters.

FIIs Rethink India Exposure

Despite heavy inflows earlier this month, foreign investors have turned cautious. In just two days, FIIs pulled out close to ₹15,000 crore, marking the steepest outflow since February. This shift coincides with improving sentiment in China, where recent policy support measures and a temporary truce in trade tensions with the US have improved the outlook for Chinese equities, which are trading at more attractive valuations compared to Indian stocks.

Yet, not all news is negative. The weakening of the US dollar has somewhat cushioned the impact of FII withdrawals. The Indian rupee, which had depreciated sharply earlier this year, has since stabilized below the 86 mark, easing concerns about currency-driven investment losses.

Fundamentals Overflows: A Case for Selective Optimism

While near-term uncertainty persists, some market experts remain constructive on India’s long-term growth story. Several macro headwinds — including FII outflows, rupee depreciation, and weak corporate earnings — have started to turn around. India’s GDP growth is expected to remain one of the highest globally, and this macro strength should eventually reflect in stock market performance.

The Q4FY25 earnings season has offered mixed signals. While overall sales growth has been in line with expectations, operating profits and pre-tax earnings have marginally surpassed forecasts. Encouragingly, there have been more earnings upgrades than downgrades in specific companies, suggesting that the worst of the earnings reset may be behind us.

However, not all sectors are equally poised. The IT sector continues to face headwinds from global uncertainty and delayed discretionary spending, leading many investors to remain underweight on the space.

Sectors and Themes to Watch

Amid this complex backdrop, opportunities still exist for discerning investors. Segments like power infrastructure, capital market-related firms, hotels, and consumer discretionary are showing signs of robust earnings potential. Especially within the small and mid-cap universe, bottom-up stock picking could yield attractive returns as several of these companies are expected to lead earnings growth over the next few years.

Real estate, on the other hand, may face temporary headwinds. While demand surged over the past few years, issues related to affordability, oversupply, and changes in tax benefits are likely to weigh on investor sentiment in the near term. That said, falling interest rates and lower home loan costs could rekindle interest in select markets over time.

Conclusion: Volatility Breeds Opportunity

Despite recent turbulence, the structural story for Indian equities remains intact. While macroeconomic data suggests a cautious stance, domestic institutional investors and retail participants have continued to pour money into the market, providing a degree of stability.

Investors would do well to remain focused on fundamentals, watch for early signs of recovery in core sectors, and use market corrections as an opportunity to accumulate high-quality stocks at reasonable valuations. Market volatility is a feature, not a flaw — and for long-term investors, it may just be the window of opportunity they’ve been waiting for.

Market this week

Source: BSE and NSE

• Indian stock markets ended the week on a cautious note, weighed down by global uncertainty and domestic anticipation.
• Benchmark indices remained volatile within a narrow range before closing marginally lower.
• The Nifty closed at 24,853.15, while the Sensex settled at 81,721.08, reflecting a muted investor tone.
• The subdued performance was influenced by both global and local factors.
• On the global front, rising US bond yields and concerns about the US debt burden led to foreign portfolio outflows, pressuring emerging markets like India.

Weekly Leaderboard

Source: BSE

Stocks that made the news this week:

Paras Defence shares jumped over 1% on May 23 after the company announced a joint venture with Israel’s Heven Drones to produce cargo drones in India. As per the agreement, Paras Defence will hold a 51% majority stake in the newly formed subsidiary, which will cater to both defence and civil sectors. The venture aligns with the Indian government’s ‘Made in India’ initiative and grants both companies the right to nominate two directors and maintain pre-emptive rights on future equity issuances.

FMCG stocks rebounded sharply on May 23, led by strong quarterly earnings from ITC, making the FMCG index the top sectoral performer. The Nifty FMCG index rose nearly 2%, driven by gains in ITC, Varun Beverages, and Nestle India. Varun Beverages surged 4.55% after a prolonged decline, while ITC climbed 3% after reporting a better-than-expected 2% year-on-year rise in net profit for Q4 FY25, despite subdued consumption trends.

Trent Ltd. and Bharat Electronics Ltd. (BEL) gained in trade after being added to the BSE Sensex effective June 23, 2025, as announced by Asia Index. Trent rose 2% to Rs 5,448, while BEL gained 0.5% to Rs 385.25. Conversely, Nestle India and IndusInd Bank will be removed from the index due to lower average free-float market capitalization, though their stocks still posted gains of 1.7% and 0.7%, respectively.