Markets at a Crossroads: Breakout, Breakdown or Déjà Vu?

The Nifty 50 index is at a critical juncture. Having flirted with the 25,200 level for three days in a row, it can either rise beyond it or retrace its steps back to the 24,500 levels. To be sure, the index has meandered largely within this range since early May and a retracement would reaffirm its rangebound fortunes.

That said, even if it manages to break out above 25,200, investors will still remain cautious. It has had false breakouts previously (once in June, and more recently, in September) only to fall back into the range once again.

This time around, whether we see a retracement, a false breakout, or a much-awaited ‘true’ breakout, will depend on which way the wind blows. Let’s discuss the various push-pull factors at play.

The Liquidity Tug of War

Foreign institutional investors (FIIs) have turned sour on Indian equities. In 2025 so far, they have withdrawn more than Rs.2.5 tn from Indian equities. Of course, this has been negated by inflows worth Rs.5.8 tn from domestic institutions (DIIs), thanks to deeper retail investor participation. Another way of looking at it is that persistent DII support has allowed FIIs to withdraw at decent prices without moving the market. In this tug of war, the Nifty 50 has appreciated by about 6% so far this year.

The most cited rationale behind FII outflows is to do with Indian equities’ premium valuation compared to EM peers. But India has been trading at a premium over peers for almost a decade now and on the back of higher growth. This is to say that it’s not valuation that’s the issue. It’s the faltering growth. While overall GDP growth has helped India retain its spot as the fastest growing major economy, India Inc.’s earnings have diverged.

For more than a year now, it is margin-expansion on lower crude and commodity-prices which have kept earnings-growth ticking at low double-digits. Topline has seen modest mid-single-digit growth. Depreciation of the Indian Rupee has also been eroding FII returns. The recent escalation of tariffs by the US has led to further depreciation to retain some degree of competitiveness in exports.

Meanwhile, China has been drawing in FII flows on attractive valuations and fiscal support which promise a turnaround. The growing appeal of gold as a safe haven has also drained funds out of stock markets.

The Economy vs Stock Markets Dichotomy

In India, GDP has been growing from strength to strength, inflation is under control, and the government has been sticking to its fiscal consolidation glidepath. There have been several sovereign rating upgrades and GST 2.0 promises a demand recovery as well. Q2 earning updates released so far and the early indicators of festive season sales raise hopes further. But we are yet to see these positive numbers trickle down to India Inc.’s earnings growth. That has made stock markets sluggish.

The opposite scenario is playing out in the US. Amid heightened policy uncertainty, inflation continues to be stubbornly higher than the Fed’s target of 2%, even as recent jobs data have come in disappointingly low. The non-farm payrolls had seen a degrowth in June, before picking up to a meagre 22,000 addition in August. For perspective, this number was 323,000 in December before Trump assumed presidency.

Such is the concern around unemployment that despite persistent inflation-concerns, the Fed meeting minutes announced this week, showed a 10-to-9 majority in favour of two more rate cuts this year. The US government is also going through another shutdown. But US stock markets continue to remain seemingly oblivious to the economic pains. MSCI US Index is up by 15% this year and NASDAQ which represents the likes of NVIDIA, Apple, Microsoft and Alphabet, has appreciated by 20%.

Similarly, despite political and economic uncertainty in France, Germany, UK and generally, across Europe, the MSCI Europe index has appreciated by 28% so far this year.

The Path Forward

Until economic growth trickles down to earnings-growth for listed companies, India’s equities will find it hard to find their footing and gain ground. Thankfully, quite a few triggers for India Inc. appear to be lining up for early next year. The full impact of GST 2.0 on domestic demand, the consequent potential recovery in private capex, the bottoming out of banking sector stress and a hopeful resolution of India’s tariff-situation with the US are all expected by Q3 FY26.

Of course, if economic growth picks up in rest of the world, Indian equities could once again find themselves competing for attention. The AI race could also play spoilsport if Indian IT does not adapt quickly enough. But if things fall into place, Indian stock markets could see a catch-up rally early next year.

Until then, it would be prudent to brace for ups and downs in rangebound markets. Any significant short-term corrections should be seen as opportunities to accumulate fundamentally strong businesses at attractive valuations. The BFSI sector, for instance, appears ripe for the picking following years of underperformance. Until a broad-based rally comes about, stock-selection will be key.

Ananya Roy is the founder of Credibull Capital, a SEBI-registered investment advisor.

Views are personal and do not represent the stand of this publication. The author does not hold shares of the companies discussed.