Indian equity markets witnessed their steepest decline in four months as broad-based selling pressure intensified across all segments. The benchmark Nifty50 index fell 2.51% to close at 25,048.65, while mid-cap and small-cap stocks suffered even more severe losses, dropping between 4% and 6% over the week.

Market Performance Overview

January 2026 has proven particularly challenging for investors across market segments:

The selloff was comprehensive, with every sectoral index closing in negative territory. Real estate stocks bore the brunt of the decline, plummeting 11%, while consumer durables fell 6.5% and media stocks declined 4%. The oil and gas, energy, infrastructure, defence, and healthcare sectors each lost approximately 3%.

FII Selling Pressure Intensifies

Foreign Institutional Investors continued their sustained exodus from Indian markets, creating significant downward pressure on domestic equities:

The net short position of 227,573 contracts in index futures held by FIIs represents an all-time high, marking only the second instance in data history and the first since the COVID period. This directional short position was established near the market peak, distinguishing it from typical contrarian buying opportunities.

Technical Analysis and Market Indicators

The Nifty has declined for three consecutive weeks, with the weekly RMI momentum indicator in sell mode since January 9th. Prices have fallen to the lower band at 24,741, representing two standard deviations below the 20-day moving average. The daily swing indicator ended the week at 17.84, with intraday readings dropping below 7, signaling extreme oversold conditions.

Using the Nifty Total Market Index comprising over 700 stocks, only 22.53% of stocks are trading above their 200-day moving average. This broad market gauge indicates widespread weakness, with readings below 20% typically signaling oversold territory.

Sector Rotation Analysis

Despite the overall market decline, certain sectors showed relative strength:

Leading Quadrant:

• Nifty Financial Services entered the leading quadrant with improved momentum
• Nifty IT continued gaining momentum and relative strength
• Nifty Bank and Private Bank showed turnaround signs
• Nifty Metal demonstrated significant improvement

Weakening Quadrant:

• Nifty Auto experienced sharp decline in relative strength
• Nifty Oil and Gas continued losing momentum
• Nifty PSU Bank showed initial turnaround signs

Global Market Influences

American markets experienced volatility following President Trump's announcement of new tariffs on European nations. However, stocks rebounded after Trump softened his stance, suggesting an agreement between NATO and the United States. The coming week is expected to be shaped by global macroeconomic developments as traders position ahead of India's Union Budget and Federal Reserve meeting.

Market Outlook

Market participants will closely monitor Fed Chairman Jerome Powell's responses regarding an ongoing investigation, as his remarks could influence global market sentiment. While no major policy changes are anticipated from the Federal Reserve meeting, the focus remains on India's Union Budget and its potential impact on market direction. Among individual stocks, Hindustan Zinc, Hindalco, Tech Mahindra, Vedanta, Shriram Finance, SBI, Tata Steel, Nestle, Federal Bank, Ashok Leyland, National Aluminium, and JK Tyre are expected to show better performance.

Indian equity markets are likely to open flat to positive on Tuesday, the settlement day for F&O monthly contracts on the NSE. Despite discussions around an India-EU deal, continuous selling by foreign portfolio investors and weaker-than-expected results by India Inc in the December quarter are weighing on investor sentiment.

Market Opening Indicators

Gift Nifty trading at 25,287 indicates a potential gain of about 80 points at the opening for Nifty. However, analysts expect limited movement given the current market conditions and ongoing uncertainties.

Foreign Investment Outflows

Foreign portfolio investors have intensified their selling activities, with total FPI selling in the equity market reaching ₹33,598 crores in January according to NSDL data. This sustained selling pressure stems from concerns over potential rupee depreciation and delayed trade agreements.

VK Vijayakumar, Chief Investment Strategist at Geojit Investments Ltd, noted that FPIs not only continued their selling spree in the week ended January 23 but also increased the intensity of their selling. Market participants believe that the delay in the US-India trade agreement will widen India's trade and current account deficits, further impacting the rupee.

India-EU Trade Deal Prospects

The potential India-EU Free Trade Agreement comes at a crucial time amid global trade fragmentation and rising protectionism. According to Madhavi Arora of Emkay Global Research, the deal could act as an effective counter-cyclical buffer by improving India's export participation in global value chains.

RBI Liquidity Support Measures

The Reserve Bank of India has announced liquidity booster measures to stabilize market conditions. The central bank will purchase government securities worth ₹1,00,000 crore through open market operations, targeting long-term funding requirements of the banking sector.

Market Outlook and Key Factors

Analysts suggest that while markets are in an oversold position due to geopolitical tensions and FII outflows, sentiment could remain weak with the Union Budget announcement approaching. Sachin Neema, fund manager at Garud Investment Managers, highlighted that investors could exercise caution ahead of the monthly F&O expiry, as any pickup in global tensions could fuel extended selling.

According to Ponmudi R, CEO of Enrich Money, Indian equities are likely to see a mild technical pullback from recent lows, supported by positive US market closes and a mildly positive tone across Asian markets. However, persistent FII outflows and continued rupee weakness against the US dollar are expected to cap upside momentum, even as steady domestic institutional investor participation continues to absorb selling pressure at lower levels.