The Indian financial markets faced significant pressure this week as the rupee touched a historic low and equity indices posted their steepest weekly decline in four months. The developments prompted intervention measures from the Reserve Bank of India to stabilize market conditions.

Rupee Touches All-Time Low

The Indian rupee fell to an all-time low of 91.93 against the US dollar on January 23, continuing its downward trajectory despite brief recovery attempts. Strong dollar demand from corporates and importers weighed heavily on the currency, pushing it dangerously close to the 92-mark even as global risk sentiment showed some improvement.

Equity Markets Post Worst Weekly Performance

BSE Sensex and NSE Nifty concluded their worst week in four months, with widespread selling pressure affecting investor sentiment. The benchmark indices experienced significant declines, with BSE-listed companies shedding an additional ₹16 lakh crore in market capitalization during the week. Overall market losses reached ₹15 lakh crore as Adani Group stocks led the decline, while the Nifty barely managed to stay above the 25,000 level.

RBI Announces Major Liquidity Support

Recognizing the market stress, the Reserve Bank of India stepped in with substantial liquidity measures. The central bank announced over ₹2 lakh crore of injections through bond auctions and scheduled a $10 billion forex swap for February 4 to provide market support.

Mixed Corporate Earnings Results

The third quarter earnings season presented contrasting performances across sectors:

Cipla reported disappointing results with EBITDA falling to ₹1,255 crore compared to ₹1,989 crore in the previous year, representing a 36.7% drop. The performance fell well below the CNBC-TV18 poll estimate of ₹1,696 crore, leading to a stock decline of over 4% as US sales narrowed and margins were impacted.

IndusInd Bank showed improved quarterly performance, posting a net profit of ₹128 crore, significantly higher than the CNBC-TV18 poll estimate of ₹42 crore. However, on a year-on-year basis, profit declined 90% from ₹1,402 crore due to elevated provisioning, though the bank's Net Interest Income topped estimates and NPAs remained stable.

International Developments

Several significant international developments impacted market sentiment during the week. A 90-member EU delegation arrived in India to advance long-pending Free Trade Agreement negotiations, even as the EU withdrew export benefits on a substantial portion of Indian shipments. Bank of America's CEO expressed bullish views on both Indian and US economic prospects, while TikTok finalized a joint venture agreement for its American operations to address regulatory concerns.

Despite recent corrections in Indian equities, market valuations remain stretched and investors should exercise caution while being selective, according to Venkatesh Balasubramaniam, MD & Head of Research at JM Financial Institutional. Speaking to ET Now, Balasubramaniam expressed concerns about market valuations that have persisted for over a year, with the Nifty 50 currently trading at around 21 times one-year forward earnings—significantly above its long-term average.

Valuation Concerns Persist Despite Market Correction

Balasubramaniam highlighted that foreign institutional investors have shown limited interest in India due to stretched valuations and a lack of near-term triggers. He emphasized that while EPS growth of 15-20% could justify a 20x multiple, current valuations should ideally move closer to the long-term mean of 17-18 times. However, strong domestic flows have prevented meaningful valuation correction, with systematic investment plan inflows reaching nearly ₹310 billion in the last month alone.

Divergent Performance Across Market Segments

While largecaps have experienced only mild corrections, the broader market has faced significant pressure. Balasubramaniam noted that smallcap and microcap stocks have declined 40-50% over the last six months, causing substantial pain to personal portfolios. He believes real opportunities will gradually emerge in select smallcap and microcap stocks over the next 6-12 months as valuations correct further.

The expert advised staggered investing rather than aggressive lump-sum deployment, citing risks of another leg down amid global uncertainties.

Domestic Flows: Compulsion Rather Than Confidence

Balasubramaniam questioned whether continued domestic institutional investor buying reflects genuine confidence or mere compulsion. He observed that mutual funds receive steady inflows and are forced to deploy capital, which may not necessarily represent a strong vote of confidence at current valuations. This dynamic has contributed to keeping foreign institutional investors on the sidelines or pushing them into selling mode.

Sectoral Preferences and Investment Strategy

JM Financial maintains an underweight stance on several sectors due to specific concerns:

Underweight Sectors:

• Banks (weak EPS growth due to margin compression in rate-cut cycle)
• Utilities
• IT services (structural concerns from global capability centres)
• Pharmaceuticals (potential EPS declines in large pharma companies)

Preferred Sectors:

• Consumer and consumption-linked stocks
• Autos and auto ancillaries
• NBFCs
• Hotels, real estate, and internet businesses

Specific Stock Recommendations

Within the preferred sectors, Balasubramaniam highlighted specific stock preferences:

Budget Expectations and Market Outlook

Regarding the upcoming Union Budget, Balasubramaniam tempered expectations, noting limited fiscal space and that most significant reforms have already been delivered. He does not expect market-moving announcements and cautioned that a post-budget sell-off cannot be ruled out. From a macro perspective, he views India's economic fundamentals as stable, supported by income tax cuts, GST rationalization, RBI rate cuts, and liquidity infusion, while flagging currency depreciation and potential infrastructure capex moderation as areas to monitor.