The Indian stock market is stuck in a range, caught between strong domestic tailwinds and persistent global headwinds. The Nifty 50, after hitting a 52-week high of 26,246.65 on November 20, has slipped below the 26,000 mark again, baffling investors, as the market has valid reasons, including better earnings, valuation comfort in large-caps, and a strong macroeconomic outlook, to see a sustained uptrend.
So, what is preventing the stock market from going up strongly?
Limping bulls
The domestic market has reasons to rise, but it is bogged down by persistent uncertainty over the India-US trade deal.
Talks have been going on since US President Donald Trump announced reciprocal tariffs in April. Later, US tariffs on Indian goods were raised to 50%. There are positive signs that both countered will seal a deal soon, but there is still much uncertainty over the timeline.
India is not rushing to finalise a deal as its economy is dominated by domestic factors. Moreover, it has not suffered a significant decline in its exports. A section of market participants believes the deal could be finalised only by the end of this year.
An India-US trade deal could provide a much-needed boost to the domestic market, which is struggling for new triggers.
“If the penal tariff is removed and India manages to secure a tariff below 20%, the Indian stock market could bounce back sharply. This could also lead to significant short covering, pushing the market up by 3-4% in a single day. However, the timing is uncertain,” VK Vijayakumar, Chief Investment Strategist, Geojit Investments, noted.
But, there is another key factor behind the listless domestic market- liquidity crunch.
In fact, some experts believe this is the biggest reason why the domestic market benchmarks have been rangebound lately.
“The only major reason behind the current market weakness is the liquidity crunch among retail investors. Today, retail investors dominate the market directly and indirectly through mutual funds. The problem is that retail liquidity has tightened, which has reduced inflows into equity mutual funds as well as direct stock investments,” said G Chokkalingam, the founder and head of research at Equinomics Research Private Limited.
And why has liquidity tightened? Because of IPO-frenzy.
Chokkalingam pointed out that IPOs have absorbed nearly ₹1.5 lakh crore, draining funds that would have otherwise gone into the secondary market. A large number of investors turned short-term traders to make quick listing gains. Many IPOs rallied initially but corrected later, trapping their liquidity.
An interesting theme to observe is that one-third of small- and mid-cap stocks are down 15% to as much as 50-60% from their peaks. Normally, in a bull market, investors keep selling one stock to buy another, creating momentum. But now, with so many stocks beaten down, this cycle has stopped.
What does it all mean? Should retail investors stop investing at this juncture and wait till a fresh uptrend starts?
Wait and watch
This is clearly not a market to earn quick money. For this is the market which will reward patient players who bet on quality stocks with valuation comfort, strong growth outlook, and superior management quality.
Chokkalingam underscored there are three factors that can improve market sentiment:
One is the time factor, in which fresh money may come to the market after some time, as new income and savings accumulate over the next five to six months.
The second factor is that a slowdown in IPO activity will trigger the return of retail money to the secondary market.
The third factor is the return of foreign institutional investors (FIIs). Their confidence in the market could attract incremental domestic flows.
Vijayakumar believes that at this stage, it’s better to wait and watch, as the market is still consolidating.
“Many expected FII selling to ease because earnings visibility for FY27 is strong and valuations have turned fair. However, foreign investors have not yet returned as expected,” Vijayakumar noted.
Chokkalingam believes the Sensex could still rise around 3% before December. However, this does not mean the rally will be even. In fact, investors should remain selective.
“At least 50-60% of equity allocation should be in Sensex and Nifty 50 stocks. The remaining allocation can go to high-quality small- and mid-cap stocks, but with a one to three year holding period, not expecting significant gains in the next three to six months. Many quality stocks have become attractive after the correction and can deliver strong returns if held patiently,” said Chokkalingam.
Is there still an opportunity to make money in this market? The answer is yes.
Historically, we have seen that investors who buy quality stocks at low levels create wealth.
“History shows that in phases where inferior stocks rally and quality stocks fall, investors who buy strong companies at beaten-down levels create wealth. In the last 30 years, those who consistently invested in high-quality value stocks after corrections have always benefited-provided they picked the right companies,” said Chokkalingam.