Market Performance – January 2025:
Indian equities witnessed a significant correction in January 2025, making it the worst-ever opening month in terms of foreign institutional investor (FII) outflows, with net sales nearing $8 billion. Broader markets faced deeper cuts compared to large caps, with the Nifty hitting a low of 22,829 on 27th January—marking a 13% decline from its September 2024 peak. Midcap and smallcap indices fell even further, correcting by 14% and 16%, respectively.
The sell-off was primarily driven by aggressive FII selling, rising US bond yields, a stronger dollar, persistent inflation concerns, weak domestic triggers, and fears of tariff wars following Donald Trump’s re-election as US President. Financial stocks saw the highest FII outflows ($1.41 billion), followed by consumer services ($405 million), power ($360 million), and capital goods ($303 million), with metals, IT, autos, and construction also witnessing sell-offs exceeding $200 million each.
The Sensex and Nifty dropped 3.5%—their sharpest monthly decline since 2017—while BSE MidCap and BSE SmallCap slumped over 9%. Elevated equity valuations exacerbated selling pressures, leading to a contraction in earnings yields beyond 5% since September 2024. A sharp 130-basis-point increase in US bond yields—despite a cumulative 100-basis-point rate cut by the Federal Reserve—also weighed on sentiment.
By late January, Indian equities entered an oversold zone, with only 17% of the NSE 500 trading above the 200-day moving average, historically signaling a market bottom. This triggered a mild relief rally in the last week of the month. As US bond yields and the dollar index stabilise, Indian equities may find some respite, though macroeconomic cues and sectoral rotation will play a crucial role in driving market trends ahead.
Sectoral performance
Indian markets saw broad-based declines in January, with only a few sectors providing positive returns. NBFCs (0.29%) and Autos (0.15%) were the only gainers, while Media (-13.04%), Realty (-12.44%), Consumer Durables (-10.06%), and Pharma (-8.40%) were the worst hit. Over a 1-year period, Healthcare (21.44%) and Pharma (20.35%) led returns, while Media and Oil & Gas posted negative growth.
Among thematic indices, CPSEs, REITs, and Indian Railway PSUs outperformed, while Capital Markets (-14.54%), IPO Index (-10.68%), and SME Emerge (-9.48%) underperformed. Strategy indices saw contraction, except for Low Volatility and Equal Weight, with Alpha 50 and Small Cap Momentum performing the worst.
Valuation-wise, Consumer Durables remain the most expensive (75.3X P/E), while PSU Banks and Oil & Gas trade at lower multiples. Despite recent corrections, high volatility persists in PSU Banks, Realty, and Metals, while FMCG and Healthcare offer stable diversification.
In the following sections, we provide a more comprehensive examination and detailed insights of some major sectors:
Auto:
India’s automobile sector started 2025 on a positive note, with retail sales rising 7% year-on-year in January. Growth was recorded across vehicle categories, driven by new launches, seasonal demand, and improved financing options. Passenger vehicles led the uptrend with a 16% increase, benefiting from strategic buying patterns and inventory clearance. Two-wheeler sales grew 4%, with urban markets outpacing rural demand, while commercial vehicles saw an 8% rise despite challenges in certain industrial sectors.
Looking ahead, factors such as supportive policies, post-budget stimulus, and effective inventory management could help sustain momentum. However, concerns persist regarding rising interest rates, rural liquidity constraints, and stricter financing norms. While February may see stable or slightly elevated sales, fewer working days and inflationary pressures could cap any significant upside. The sector’s performance in the coming months will depend on its ability to balance inventory with actual demand and navigate evolving market dynamics.
Construction:
India’s construction sector saw improving trends in January 2025, driven by rising demand and better cement pricing in key regions. After subdued prices in October and November, a turnaround began in December, supported by government infrastructure spending and rural housing growth. This momentum carried into January, with North India leading in price gains and profitability. The West and Central regions also witnessed significant price improvements, reinforcing positive sentiment.
However, challenges persist in the East, where pricing pressure remains despite some demand recovery. South India continues to lag in price hikes, with Andhra Pradesh emerging as a key factor for future stability. Going forward, further price increases are expected in North, West, and Central India, backed by strong demand and industry-wide pricing discipline. The pace of recovery in the East and South will be critical to sustaining overall sectoral growth in the coming months.
Metals:
The metals sector showed mixed trends in January, with ferrous metals facing pricing pressures while non-ferrous metals witnessed a notable uptrend. Indian HRC prices remained flat, though mills have announced hikes, and upcoming maintenance at major plants could tighten supply. Billet prices declined slightly amid cautious market sentiment, while iron ore and Chinese HRC prices remained stable. Weak demand led to a marginal drop in coking coal prices.
In contrast, non-ferrous metals saw strong gains, driven by global trade developments and positive manufacturing data. Aluminium rose 1.6% on expectations of U.S. tariffs, while copper surged 4% on hopes of easing U.S.-China trade tensions. Zinc, nickel, lead, and tin also recorded steady increases, reflecting improved demand prospects. Going forward, ferrous metals may face near-term volatility, while non-ferrous metals could benefit from global macroeconomic trends and policy shifts.
Banking:
The banking sector has seen a notable slowdown in unsecured lending following the RBI’s risk-weight hikes, a move that has effectively curbed aggressive expansion in this segment. While overall growth in unsecured personal loans has dropped to single digits from the high double digits seen previously, some banks continue to expand cautiously, focusing on borrowers with strong credit profiles.
Credit card growth remains relatively resilient, with most banks maintaining double-digit expansion. However, rising stress from previously underwritten riskier loans could pose challenges in the coming quarters. While lenders have tightened underwriting standards, the full impact on asset quality will become clearer in upcoming earnings reports. The RBI remains firm on its stance and is unlikely to lower risk weights anytime soon. Moving forward, banks are expected to tread carefully, balancing growth in high-yield segments with prudent risk management to mitigate potential stress.
Important events & updates
A few important events of the last month and upcoming ones are as below:
- The Union Budget 2025-26 prioritizes consumption-led growth, raising the income tax exemption from ₹7 lakh to ₹12 lakh. It targets a 4.4% fiscal deficit, with ₹50.65 lakh crore in expenditure and ₹11.21 lakh crore for infrastructure, aiming for 10% growth.
- India’s HSBC Manufacturing PMI for January 2025 stood at 57.7, below the forecast of 57.8 but above December’s 56.4. It marked the fastest growth since July, driven by a six-month high in new orders and the strongest export surge in nearly 14 years.
- Deposit growth in India rose to 10.8% as of January 31, 2025, up from 9.8% in the previous report.
- India’s HSBC Services PMI for January 2025 was revised to 56.5, down from the preliminary 56.8 and December’s four-month high of 59.3.
- India’s HSBC Composite PMI fell to 57.7 in January 2025, down from 57.9 (flash estimate) and December’s 59.2, marking a 14-month low. However, it remained in expansion for the 42nd straight month, staying above the long-run average of 54.7.
- The RBI cut the repo rate by 25 bps to 6.25% in February, its first reduction since May 2020, aligning with market expectations. This brings borrowing costs to their lowest since January 2023, aimed at supporting growth amid global trade uncertainty.
- India’s annual inflation rate dropped to 4.31% in January 2025 from 5.22% in December, lower than the expected 4.6%, marking the slowest price rise since August 2024.
Fundamental outlook:
The Union Budget FY26 has ushered in a significant shift towards consumption-driven growth, particularly aimed at benefiting the middle class. The personal income tax exemption limit has been increased from INR 7 lakh to INR 12 lakh, providing a substantial boost to disposable income and spurring demand, especially in urban areas where consumption had been weak. This tax relief will likely stimulate consumption in sectors like FMCG, retail, automobiles, and tourism, as it directly impacts middle-class purchasing power. The government’s emphasis on rural and infrastructure development is also notable, with increased allocations for rural development, skill enhancement, and agriculture, likely to boost consumption in these sectors.
Although the CAPEX spending for FY25 has been revised downward, the government has set a target of 10% growth in CAPEX for FY26, aligning with the nominal GDP growth of 10.1%. This continued investment in infrastructure—especially in roads, railways, and power—is expected to have long-term economic benefits and act as a catalyst for growth in both urban and rural areas. The fiscal deficit target for FY26 is set at 4.4% of GDP, indicating fiscal discipline. Meanwhile, India’s GDP growth estimate of 6.7% for FY26, supported by a recovery in manufacturing and strong agriculture activity, provides a solid foundation for future economic expansion. With inflation projections lowering to 4.2% for FY26, the government’s approach is designed to support growth while keeping inflation in check. The external sector remains resilient, with India’s foreign exchange reserves at USD 630.6bn, ensuring ample import cover. Additionally, India’s financial sector stability remains intact, with healthy banking sector parameters and robust capital flows despite a recent liquidity deficit.
Technical outlook.
The market is currently in a neutral zone, as indicated by India’s VIX, which remains below its long-term average, suggesting balanced market sentiment. High-frequency indicators support a positive outlook for the medium to long term. The HSBC India Manufacturing PMI for January 2025 stands at 57.7, reflecting the fastest expansion since July 2024, while the Services PMI, revised to 56.5, demonstrates steady growth in the services sector despite a minor decline. Moreover, India’s inflation rate dropped to 4.31%, marking the softest price growth since August 2024, and the RBI’s repo rate reduction to 6.25% signals a focus on stimulating economic activity amid global uncertainties. The fiscal deficit target for FY26 is set at 4.4%, demonstrating fiscal prudence while supporting consumption-driven growth.
In terms of technical levels, primary support is at 22,950, with major support at 22,800, indicating key levels to watch for downside protection. On the upside, primary resistance is seen at 23,500, while major resistance is at 23,800. These levels provide critical guidance for short-term price movements, with a positive market outlook supported by strong fundamental indicators.
Outlook for the Global Market
US Market:
The US stock market had an exceptional 2024, with the S&P 500 climbing 25%, marking its best two-year performance since 1998. The top 50 stocks in the index, including major tech players, performed even better, rising 34%, fueled by strong growth, economic strength, and optimism around AI. However, smaller companies, such as those in the S&P MidCap 400 and S&P SmallCap 600, underperformed, with gains of 14% and 9%, respectively. Despite this, 2024 was marked by impressive sector performances, with Communication Services, Information Technology, and Financials leading the way, each up by more than 30%. Growth stocks, particularly in the tech sector, saw strong momentum, and the S&P 500 Momentum Index rose by 46%.
The start of 2025 has been similarly positive, with the S&P 500 gaining 2.7% in January, despite rising bond yields and a decline in the technology sector. While this is encouraging, there are signs of caution as some stocks have become highly volatile, particularly in tech. The broader market’s overall volatility remained low in 2024, but there are concerns that a slowdown may be on the horizon, especially for companies heavily dependent on technology growth. Inflation risks have also remained a point of focus. However, recent economic data, including the December Producer Price Index and Consumer Price Index reports, suggest inflation is contained for now, helping alleviate some concerns.
With new policies expected to shape the economy, particularly around trade and tariffs, investors will need to closely monitor how the Federal Reserve responds, as monetary policy will play a crucial role in shaping the market’s direction. The year may not see another surge of double-digit returns like 2024, but growth is still expected, just at a more moderate pace. As a result, maintaining a diversified portfolio will be important to navigate potential shifts in economic conditions and market sentiment.
Outlook for Gold
Gold prices have been on an upward trajectory, driven by a confluence of factors including rising economic uncertainty, inflation fears, and shifting investor sentiment. The latest US tariff announcements, notably the 25% tariffs on aluminum and steel imports, have raised concerns about global economic stability. These developments are expected to increase production costs and inflation, which could trigger a shift in investor preferences towards safe-haven assets like gold.
As of February 12, 2025, the price of 10 grams of 24K gold in India spiked to ₹87,417, continuing the trend of rising gold prices. This increase comes on the back of a broader global trend where gold continues to attract investors seeking to protect their wealth amid economic volatility. Central banks are also playing a key role, with many increasing their gold reserves as a hedge against currency fluctuations and economic crises, further driving demand for the precious metal.
In India, gold has seen an extraordinary return over the last decade. The cost of 10 grams of 24K gold has risen from ₹29,600 in 2013 to ₹86,990 in 2025, representing a return of more than 230%. This performance underscores the appeal of gold as a store of value, particularly in times of inflation and economic uncertainty.
While gold’s rise is impressive, it is important to consider both the potential rewards and risks. Gold’s status as a safe-haven asset makes it an attractive investment during periods of economic stress, yet its price can be volatile in the short term. As gold prices surge, investors need to be cautious about entering at peak prices, as the potential for a correction or stabilization remains.
Looking ahead, gold prices are likely to remain volatile as they are influenced by factors such as tariff policies, central bank actions, and inflationary pressures. Despite the challenges, gold’s role as a hedge against inflation and its ability to retain value in uncertain times continue to make it a desirable investment, especially for long-term wealth preservation.
What should Investors do?
The market outlook remains cautiously optimistic, with India’s long-term growth story firmly intact, bolstered by structural advantages, government initiatives, and increasing capex-driven growth. The recent Union Budget 2025-26, with its focus on consumption-driven growth and tax reliefs, is expected to positively impact sectors related to retail, FMCG, and automobiles, among others. However, we will continue to monitor its long-term effectiveness in driving sustainable growth. Near-term volatility is expected, as global factors such as potential U.S. policy shifts, trade dynamics, and oil price movements will play a significant role in market sentiment. Domestically, the RBI’s rate-cut decisions and inflation trends will remain crucial in shaping market expectations.
While India’s economic foundation is strong, with expected double-digit earnings growth and significant contributions from financials in FY25/26, the current market valuations suggest limited room for immediate upside. This calls for a cautious approach for investors. Given the potential for market fluctuations and ongoing global volatility, we recommend avoiding lump-sum investments at this point. Instead, investors should focus on systematic investments, with an emphasis on quality companies and a long-term horizon. Staying nimble and informed will be key to navigating this phase effectively.
Disclaimer:
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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