Markets sulk on capex blues, consumption stocks gain

Foreign portfolio investors (FPIs) gave a thumbs-down to the budget at Saturday’s special session, selling a provisional ₹1327.09 crore worth of shares, even as domestic institutional investors net purchased equities worth ₹824.38 crore.

The Nifty ended down 0.11% at 23482.15 while the Sensex ended up a mere 0.01% higher at 77505.96. The correction in markets, driven by FPIs selling ₹2.37 trillion worth since October, is expected to continue with small and mid-cap stocks underperforming large-caps, market veterans said.

“Amid a slowdown in economic growth, slow private capex and a depreciating rupee, the market was expecting government heavy-lifting to give the desired boost, which probably didn’t materialize the way it had hoped for, resulting in the sluggish response,” said Swarup Mohanty, CEO & vice-chairman of Mirae Asset Mutual Fund.

“To be sure, the boost via the ₹1 trillion forgone by the personal income tax breaks would aid consumption and savings of middle and lower income groups, but the Street was hoping for sizeable allocations on railways or roads, the absence of which led to the disappointment,” he added.

The government revised the capex for FY25 to ₹10.18 trillion from the budgeted ₹11.1 trillion. The estimated ₹11.2 trillion for FY26 didn’t excite the Street, amid doubts on whether the target for the forthcoming year would be met.

The government stayed the course on the fiscal deficit, targeting it at 4.4% of GDP for FY26 from 4.8% in the current fiscal. However, this may tie its hands on how much it could spend, according to Siddhartha Bhaiya, MD & CIO of Aequitas Investment Consultancy Pvt. Ltd. He said that though consumption would get a boost from the tax cuts, the high valuations in mid- and small-caps and continued capital outflows by foreign investors make him “cautious.”

The trigger

The next trigger for markets will be the outcome of Friday’s monetary policy meeting, with many investors expecting a rate cut. However, Bhaiya ruled out the possibility of a rate cut on the grounds that this would further narrow the spread between the 10-year bond yields of India and the US, leading to heavier FPI outflows.

The Street’s disappointment on the capex front was reflected in the stocks of Bharat Electronics Ltd, Powergrid Corp., Larsen & Toubro Ltd and Grasim Industries, which fell between 2.8% and 4.1%.

Meanwhile, shares of Trent, ITC Hotels, Maruti Suzuki, Tata Consumer Products and Eicher Motors gained between 4% and 7%, reflecting the optimism on consumption.

“We continue to remain bullish on large-caps like select private banks, pharma and consumption themes, but expect the underperformance in small-caps and mid-caps to continue,” said Gaurav Dua, senior vice-president and head of capital markets at Mirae Asset Sharekhan.

However, Amisha Vora, chairperson and managing director of PL Capital, said the budget “to a great extent” had done “justice” sticking to the glide path on the fiscal deficit, addressing the consumption slowdown through income tax breaks, and increasing the capex for FY26 by 10%.

Nifty Options contracts expiring on 6 February reflected the bearish sentiment prevailing over bullish mood as of Saturday. This is because call option open interest—open buy and sell positions—exceeded put option open interest. The put-call ratio, a pointer of market sentiment, stood at 0.76. This means for every 100 calls sold only 76 puts were sold.

An option seller sells more calls than puts in the belief that markets would fall or remain flat, enabling him to pocket the premiums paid by the call buyers. This is a bearish sign.

The broad range suggested by the options contract open interest is 23,000-24,000 for the week ending Thursday.

The Nifty has fallen 10.6% from a record high of 26277.35 to Saturday’s 23482.15, while the Sensex has plumbed 9.85% from its record high of 85978.25 on the same date to 77505.96.