The Month that was : February 2025

Equity market weakness continued in February with Nifty50 Index declining by 5.9%. It was Nifty's fifth consecutive month of loss which is a rarity and has come after almost 3 decades. Mid-cap and small-cap indices underperformed Nifty significantly, falling by 10.8% and 13.1%, respectively as profit booking was witnessed across the board. All sectors fell, with capital goods, PSUs, and real estate showing sharp declines of 14.4%, 13.5%, and 13.4%, respectively. Market sentiment was weighed down by uncertainty surrounding US trade tariffs, weaker-than-expected corporate earnings, stretched valuations, and strong outflows by FIIs. India underperformed most global markets with strong gains in Hong Kong, Germany, and Mexico, while Indonesia, Thailand, and Japan faced notable declines.

Key developments during the month included the Union Budget for FY2026 maintaining a gradual fiscal consolidation approach while introducing measures to boost consumption. RBI began the rate-cut cycle with a 25-bps reduction in the repo rate to 6.25%. Also, RBI eased risk-weight norms for bank lending to NBFCs and microfinance institutions easing credit flow into these sectors. FIIs continued their selling streak, with outflows of $4.7 billion worth of Indian equities and DIIs stepped in with net purchases of $6 billion during the month.

Market Outlook

The equity market has continued to witness sharp correction over the past few months, particularly in the mid and small-cap segments due to aggressive FII selling exacerbated by weakness in economic and earnings growth. Trade policy by president Trump has created additional uncertainty for the markets. However, we consider this correction as a short-term volatility in the market as India’s structural growth drivers i.e. robust domestic consumption, revival in capital expenditure and a resilient banking sector continue to support long-term equity market prospects. Post this correction market multiples have come to a reasonable level compared to the historical average. With expected uptick in both GDP and corporate earnings growth from Q4FY25 onwards, investors are advised to focus on quality stocks in sectors such as healthcare, banking, consumer discretionary and industrial to accumulate in this market correction.