FPI sell-off, retail panic fuel sharp market correction; mid, small caps enter negative territory | Stock Market News

On a day global stock indices were battered by rising international trade tensions induced by US President Donald Trump, Indian markets followed their slump, with all gauges dipping sharply.

Japan’s Nikkei and China’s CSI 300 fell 2.88% and 1.97%, respectively, amid weak openings for Germany’s Dax and French CAC.

Almost on cue, the Indian benchmarks—Nifty and Sensex—plunged 1.9% each to 22,124.7 and 73,198, respectively, leaving investors poorer by ₹9 trillion on Friday.

Foreign portfolio investors (FPIs) dumped shares worth a provisional ₹11,639 crore and shorted index futures worth ₹2,474 crore. While domestic institutional investors (DIIs) purchased shares worth ₹12,309 crore, likely selling of leveraged positions by retail investors combined with FPI selling in cash and derivatives offset their buying, said analysts.

The benchmark indices neared their election result-day lows, with the Nifty resting just 1% above its 4 June low of 21,884.5, and the Sensex 1.5% above its low of 72,079.05 after Friday’s close. On a one-year return basis, the Nifty and Sensex are in positive territory by the skin of their teeth, with Nifty up by just 0.6% and Sensex, by a mere 1.2%.

Further, the key midcap index joined its smallcap gauge to turn in a negative return on a one-year basis, an occurrence that normally sends panic bells ringing among retail investors.

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Such has been the hammering that more than 60% of Nifty50 stocks and 90% of Nifty Smallcap stocks settled below their 52-week highs after Friday’s trading.

Markets had plunged on 4 June in response to the BJP falling short of winning a majority on its own in the national elections, but rallied to all-time highs in September on the premise of political continuity through a coalition.

The Nifty Midcap 150 slipped into correction territory Friday after tanking 2.35% to 17750.55—a fall of more than 20% from its record high of 22,515.4 on 25 September. The Nifty Smallcap 250 index, meanwhile, is now down 26% from its record high of 18,688.3 on 24 September, after plunging 2.5% to 13,844.55 on Friday.

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The Nifty Midcap 150 and the Nifty Smallcap 250, the favourite hunting grounds for retail investors, have given negative returns over one year — the former at Friday’s closing was down 0.5% over the past one year while the latter was down 7.5% over the same period.

What analysts say

While some market veterans raised the red flag because of the negative one-year returns, others sought to water down the anxiety by saying that after such a steep fall, the chances of a rally over a deeper fall tended to be stronger.

” money flowed into the markets in the past one year than in the prior four years, so after the present correction, the five-year returns will be below FD (fixed-deposit) returns,” said Niharika Jain, co-fund manager of wealth management firm Aequitas Investments.

Jain, whose fund had less than 10% exposure to equities for the past four months, with the balance in gold and liquid funds, said that the biggest mistake is “averaging on the way down ” and that the best approach for retail now would be to “reassess their asset allocation plans” if they are overexposed to equities.

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Nithin Kamath, founder of India’s second largest retail broker Zerodha, tweeted that markets were “finally correcting” and could fall more just like they rose to the peak (September 2024), given that they swing between extremes.

Kamath red-flagged the fall in both exchange volumes and number of traders, which underscored how shallow Indian markets were with only 10-20 million Indians engaged in investing activity. He said there was a 30% drop in activity across brokers and that this had led to a de-growth in business for his firm for the first time since it started 15 years ago.

He added that if the correction continued, the government would fail to garner even ₹40,000 crore from securities transaction tax next fiscal, which would be at least 50% below the estimated ₹80,000 crore.

However, Devina Mehra, founder and chairperson of asset management firm First Global, said that odds of a rise were shorter than those of a fall after a steep correction.

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“It’s hard to call a bottom but after such a fall, the percentage fall risk is much less than the percentage rise risk,” Mehra said. “It’s not during a bull market but rather at such times, when fear mongering is at its peak, that markets can make a sharp move up. So while there is a risk to investing, there is one also to sitting it out.”

Highest open positions

Weekly Nifty options data, a day after the expiry of the February series, shows that supports lie at 22,000, 21,800, 21,000 and at 20,800, which interestingly has the highest open or outstanding positions, for the next week. The strongest resistance lies at 22,500.

The bias to the downside could continue despite markets being highly oversold, with Nifty futures contract seeing a jump in open positions by almost 7% as the index plunged. This shows bearish sentiment continuing.

The extent of the bear onslaught is evident in that more than 60% of the Nifty 50 companies have fallen more than 20% from their 52-week highs as of Friday. Some of the steep corrections have happened in Tata Motors, Adani Enterprises, Trent and Reliance Industries.

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Over 90% of Nifty Smallcap shares, including Sun Pharma Advanced Research, Sterling & Wilson Renewable Energy and Chennai Petroleum, trade below 20% from their 52-week highs.

Likewise, more than four-fifths of Nifty Midcap 150 companies trade below 20%, with the worst affected including Vodafone Idea, MRPL and Cochin Shipyard.

All broad market and sectoral indices ended in the red.