India's stock markets are caught in a self-reinforcing trap of foreign selling and currency weakness, even as domestic earnings hold up better than feared, says veteran market analyst Sandip Sabharwal of asksandipsabharwal.com.
The vicious cycle nobody wants
Sabharwal laid out the core problem plainly. When the rupee weakens, foreign investors grow nervous and sell Indian stocks. That selling pushes the rupee down further, which triggers more selling. Round and round it goes.
"It is a vicious cycle," he said, adding that the government has not fully appreciated how critical it is to actively attract both portfolio flows and foreign direct investment. With ample capital available globally, Sabharwal believes India is losing out not because of a shortage of money worldwide, but because of policy reluctance to court it aggressively.
Q4 earnings were actually decent
Here is the part the market selloff is obscuring. Corporate earnings for the March quarter have been surprisingly resilient. Out of roughly 30 Nifty companies that have reported, around 11 beat expectations, only three missed, and the rest came in broadly in line.
Consumer companies are signalling sustained demand. Capital goods firms are reporting healthy order books. Financial sector results have held up. Sabharwal sees the earnings season as providing a floor to the market even if it cannot stop the bleeding caused by foreign outflows.
He also does not see a major risk to the widely expected 10 to 12 percent earnings growth for FY27, saying that target should be achieved relatively easily based on what companies are currently delivering.
Domestic investors are the quiet backbone
While FIIs pulled out as much as Rs 8,000 to 9,000 crore in a single day at points during this correction, domestic money has remained remarkably steady. AMFI data showed equity mutual fund inflows of over Rs 58,000 crore with SIP contributions of nearly Rs 31,000 crore in the latest month.
Sabharwal called this structural and permanent. Retail India's habit of investing monthly through SIPs is now deeply ingrained and will not break unless the country goes into a prolonged recession or markets fall more than 25 to 30 percent, both of which he considers unlikely.
Do not expect a snap-back in retail trading activity
While SIP flows remain strong, direct retail and HNI participation in secondary markets has cooled in recent months. Sabharwal does not expect a quick revival. Most retail investors trade on the long side, and without a market upswing to restore confidence, trading volumes are likely to stay subdued for some time. He also noted a quiet shift where smaller investors who tried direct stock picking are now moving back toward mutual funds.
One stock worth watching: Indian Hotels
Amid all the gloom, Sabharwal highlighted Indian Hotels, Taj's parent company IHCL, as a standout long-term bet. Despite some exposure to its Dubai properties amid Middle East uncertainty, he believes the domestic hotel business will stay strong, powered by robust travel demand and a busy wedding season.
The stock has already corrected from a high of Rs 850 to around Rs 660. Sabharwal, who has held the stock for a long time, sees 15 to 20 percent upside over the next year, backed by a strong balance sheet, healthy cash flows, and several more years of earnings growth ahead.
The big picture
India's market weakness right now is more about sentiment and external noise than fundamental cracks. When the external environment settles and foreign flows eventually return — and Sabharwal believes they will — a market with solid earnings growth and deep domestic investment culture will be well positioned to reward patient investors.
