Difficult to say Indian stock market has bottomed out; Budget may boost sentiment: Ajay Menon of Motilal Oswal | Stock Market News

Expert view: Ajay Menon, MD & CEO, Wealth Management at Motilal Oswal Financial Services, believes several key events will keep the market sentiment cautious in the near term, making it difficult to say if the Indian stock market has bottomed out. In an interview with Mint, he said the Union Budget 2025 will offer important signals to the market. Income tax reforms and increased infrastructure funding will likely boost market sentiment.

Edited excerpts:

The Nifty 50 is down over 12% from its peak. What are the key reasons behind this fall?

The Indian markets are currently navigating an interim phase of course correction. 

The fall in Nifty has been mainly triggered by subdued earnings performance in the first half of the current financial year (H1FY25), with weakness continuing in Q3 results as well as unprecedented selling by foreign institutional investors (FIIs). 

FIIs sold more than ₹1.5 lakh crore in October and November, followed by a comparatively cooler December, while January again witnessed heavy selling. 

Earnings moderation and elevated valuations in mid-caps and small-caps, along with a strengthening dollar index after Donald Trump’s election victory, led to FIIs shifting away from India. 

Further, there have been a lot of headwinds on account of geopolitical tensions, global economic slowdown, persistent inflation, and heightened investor uncertainty amid fears of tariff wars.

Has the market bottomed up, or is there more pain left?

The stock market hasn’t had the best start to this year. Consistent FII selling amidst slower earnings growth has led to a steady decline in the Nifty 50. 

The December quarter results have been a mixed bag so far, with a lacklustre management commentary in terms of the Q4 outlook. 

However, the overall FY26 guidance remains optimistic, and the long-term trend stays positive, given the prospects of profitable business growth. Indian markets are likely to face significant influences from a combination of global and domestic economic events. 

The anticipated start of a rate cut by the RBI in 2025, the ongoing trend of the US interest rate, and the expectations surrounding trade policy changes by US President Donald Trump will contribute to market volatility. 

Additionally, the upcoming Union Budget will offer important signals to the market. Therefore, a line-up of key events in the near term will keep the market sentiment cautious, making it difficult to say if the market has bottomed out.

Do you expect the Budget to boost market sentiment? Is there a risk of a populist budget?

The Budget 2025 will be crucial for the government as it will have to balance growth and fiscal discipline. 

The government is expected to boost consumption. The Budget will likely introduce income tax changes to support low-income individuals, announce new employment schemes and investment allowances, and focus on capital expenditure (capex) by allocating funds to key infrastructure projects like roads, railways, and defence. 

The government is also focusing on positioning India as an export hub through initiatives like Make in India and the PLI scheme. 

Electronic manufacturing and data centres may receive larger allocations and possible tax incentives. 

Hence, we anticipate that expected income tax reforms and increased infrastructure funding will likely boost market sentiment and economic growth amid challenges like slowing growth and foreign capital outflows.

How could Donald Trump’s return to the White House affect investing in India?

The initial stock market rally after Trump’s victory was driven by hopes for business-friendly policies and a stable global outlook. 

However, the volatility since then reflects growing concerns about his administration’s approach towards trade, geopolitical tensions, and economic policies. 

The return of Donald Trump as US President could bring mixed implications for Indian stock markets, depending on his policies. 

His ‘America First’ agenda might tighten trade conditions, but stronger US-India ties could benefit sectors like IT, pharmaceuticals, and defence. 

However, the potential revival of H-1B visa restrictions might pressure Indian IT firms. Trump’s tough stance on China could position India as a strategic partner, attracting FDI into manufacturing and defence. 

A stronger dollar could trigger foreign outflows, impacting the rupee and equities, while a weaker dollar would support FPI inflows.

The hope of a Fed rate cut is drying. Should we brace for more foreign capital outflow?

The Federal Reserve kept the interest rate steady in January 2025, pausing its rate-cutting cycle after three consecutive reductions in 2024 that totalled to a full 1 per cent cut. 

The trend of FII selling in the cash market could continue in the context of a resilient dollar and attractive US bond yields. 

Two factors can cause a change in this trend: a decline in the dollar and US bond yields and positive developments on India’s economic growth and corporate earnings front. 

That being said, we anticipate a positive outlook based on Budget policy announcements and an expected growth trajectory post-bottoming out of earnings in Q4FY25, which could stabilise foreign fund flows.

How should we look at the IT sector in the wake of Q3 earnings?

The Q3FY25 earnings season highlighted a mix of resilience and challenges for large-cap IT companies. 

While growth and margins showcased strength, headcount and attrition trends warrant close monitoring. 

The robust deal wins and positive, forward-looking commentary, particularly from TCS, signal optimism for the future. 

That said, looking beyond seasonality, macro uncertainty is gradually easing, and we expect the outlook for technology spending to improve in CY25. 

Recovery appears to be expanding beyond US BFSI—which continues to strengthen—into additional industry verticals such as Hi-Tech, which is recovering ahead of schedule. 

The return of Donald Trump as US President and healthy US-India ties could benefit the Indian IT sector but potential revival of H-1B visa restrictions might pressure tech firms. 

We expect tier-2 companies to continue outpacing tier-1 firms in growth during the quarter. The sector’s most important catalyst will come after Q3FY25 when client budgets for CY25 will be finalised.

What should be our investment strategy amid the current market volatility?

The latest correction in Indian markets has cooled off valuations in large-caps, even as mid- and small-caps continue to trade at a premium to their historical averages. 

In the near term, we suggest investors maintain an overweight position in large-cap stocks while selectively allocating to mid and small-cap stocks. With key global and domestic events lined up for the next few weeks, investors should steer clear of high-beta stocks, which tend to be more volatile. 

Instead, focus on fundamentally strong companies that demonstrate robust growth potential. Prioritizing stability over speculation can help mitigate risks and provide a more secure investment environment.

With the increasing importance of technology in financial services, how is it helping the growth of your business?

At Motilal Oswal, technology drives all our initiatives, enabling us to cater to the ever-growing demands of Indian tech-savvy investors. 

Our RISE app, which was launched recently, has been carefully designed to fulfil the needs of conservative investors and high-volume traders. It’s a one-stop shop for all products, including stocks, mutual funds, PMS AIF, bonds, insurance and multiple other services.

We carefully bucket our customers based on their preferences and needs. Our personalisation engine, driven by AI and ML models, empowers our customers to decide based on their preferences and investment styles. 

For high-end traders, we offer cutting-edge tech solutions through desktop-based trading terminals and algo solutions for high-speed execution as well as help process large orders. We have also developed our in house Quant advisory services in addition to the world class Research we provide to our customers. Over the years Motilal Oswal has invested heavily on technology and will keep doing so in future.

Do you see ample growth scope in tier-2 and tier-3 cities?

Tremendous growth is visible in tier-2 and tier-3 cities; today, 77 per cent of new accounts for the industry come from these markets and is growing at 20 per cent +. We have a branch network in 62 major cities and a franchisee network beyond them, too, and we look to strengthen our position there further. 

There is a visible demand for full-service broking in these cities as the HNI/affluent population is growing faster here. However, compared to the metro cities, the RPC is 40 per cent less in these cities as the equity culture is still evolving.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.