Start Rebuilding Portfolios When FII Selling Abates

The first two steps have been taken. The Reserve Bank of India opened the liquidity tap just before the budget, while the Finance Minister gave tax exemptions. The third one is expected in the form of a rate cut on Friday.

Together, these three steps will provide the much-needed boost to confidence. While they may not be sufficient to fully reignite growth, they signal that the government and RBI are aligned in their efforts to restore GDP momentum.

The markets will oscillate between hope and fear. There will be alternate bouts of selling and buying. Traders will have a field day in the interim, making the best of both ends.

But an important indicator of turnaround appeared on Tuesday. FIIs turned net buyers to the extent of over ₹8 billon for the first time in a month.

Indian markets have corrected sharply from their highs. Benchmark indices Nifty 50 and Sensex are down about 11% from their all-time highs; midcap index about 13 % and smallcap index about 14%. Individual stocks have corrected by 25-35%. Excesses have been almost evened out, give or take another 5%.

The budget has turned the mood in the market, and more importantly, the determination to bring growth back seems to be recognised.

The focus now shifts to the RBI. One never knows what stance the monetary policy committee will take. Most members will vote for a rate cut, which is long overdue. It is widely expected that the MPC will cut rates by 25 basis points. But that won’t be enough to pull the economy back on its rails. There has to be a sustained cut in rates over the next year or so. Only then can we see some meaningful revival in growth.

The general impression is that the widely cheered income tax exemption will revive consumption. However, it may not do much as household budgets are already overburdened with rising costs. It could be a relief for sure, but not enough to spur consumption across the board at a macro level.

What we need is a combination of relief measures and cost reduction. The latter will help improve margins for businesses, which will change the fundamentals of the market game. It is the expectation of better earnings from corporates that will reverse FII outflows. They sold nearly ₹870 billon in January 2025. 

On the positive side, the focus has now shifted to earnings from euphoria. However, early signs of sustained slowdown in growth are emerging, which needs to be checked to avoid a downward spiral.

A combination of radical income tax exemption, lower cost of funds through rate cuts and fiscal discipline will help prevent economic growth from derailing. The Finance Minister has taken a practical approach by redistributing unutilised capex in the form of exemptions while keeping the fisc under check. 

The FIIs know this. One is not sure if they will continue to buy, but large and sustained selling could abate in the coming weeks.

Finding a better bargain than the current levels could be tough. Averaging from here, either through mutual funds or stocks will help in the medium to long run. Wealth can be created only when you get a chance to buy good stocks. The time has come to restart portfolio building for the long term.