Market volatility has gripped Indian equities as foreign institutional investors continue their selling spree while trade tensions with the US escalate. Vinit Bolinjkar, Head of Research at Ventura, provides insights into the factors driving current market dynamics and sectoral opportunities despite global headwinds.

Key Drivers of Market Volatility

The Indian stock market faces multiple challenges that have contributed to sustained volatility. Foreign institutional investor outflows have emerged as the dominant factor, with FII holdings dropping to a 15-year low near 17%. The scale of selling has been substantial, with FIIs pulling ₹2.00 lakh crore from key sectors including financials and IT, followed by fresh exits of ₹12,000.00 crore in January amid global risk-off sentiment.

Trade tensions have intensified following President Trump's team citing PM Modi's unreturned call, leading to the imposition of 50% tariffs on Indian steel, textiles and electronics. While India continues ongoing talks to address these concerns, the uncertainty continues to weigh on export-oriented sectors.

Additional pressures include muted earnings growth expectations of 8-16% versus the anticipated 20%, elevated input costs with oil above $80 per barrel, and rich valuations with Nifty trading near 24x PE. Corporate-specific challenges such as Reliance facing capex delays and HDFC Bank dealing with net interest margin headwinds have also contributed to market sentiment.

Q3 FY26 Earnings Assessment

Despite the challenging environment, Bolinjkar maintains cautious optimism regarding earnings trends. The Nifty EPS growth projection of 8-16% year-on-year represents the strongest performance in 8 quarters, driven by earnings upgrades after five consecutive quarters of downgrades.

Several factors support this optimistic earnings outlook. The rupee's position at 86 per dollar provides margin benefits for IT and pharmaceutical companies. Festive demand has supported consumption patterns, while infrastructure spending continues to lift industrial sectors. However, risks from potential US economic slowdown and raw material inflation remain key monitoring points.

Banking Sector Outlook

The banking sector presents a mixed but generally positive outlook with credit growth expected at 10-11% across segments. Retail banking is projected to grow at 15%, MSME lending at 12%, and corporate lending at 8%. Net interest margins may find stability through potential CRR cuts, while asset quality metrics show improvement.

Asset quality is expected to peak with Gross Non-Performing Assets ranging between 2.30-2.60%, representing the lowest levels in decades. Public sector banks are positioned to outperform based on loan momentum, with SBI showing 13% growth, supported by government recapitalisation efforts. Private banks continue to excel in return on assets and return on equity metrics.

Sectoral Investment Themes

Bolinjkar identifies several multi-year investment themes aligned with India's 8% GDP growth trajectory, capex cycle expansion, and PLI scheme implementation. The BFSI sector stands to benefit from the credit boom and NBFC revival, while consumption and discretionary spending sectors may gain from rural recovery supported by favorable monsoon conditions and ongoing premiumization trends.

Defence and manufacturing sectors appear attractive due to strong order execution capabilities and the China+1 diversification factor. Green energy presents significant opportunities with India targeting 450 GW renewable capacity by 2030, representing a five-fold increase in solar capacity. Technology, IT, and telecom sectors offer potential through AI adoption, 5G rollout acceleration, and export market recovery.

Disclaimer: This analysis is for educational purposes only. The views expressed are those of individual analysts, not Mint. Investors should consult certified experts before making investment decisions.

Indian equity markets have witnessed a sharp correction in January 2025, falling in 11 out of 15 trading sessions ahead of Budget 2026. The decline reflects investor concerns over budget-related uncertainties, geopolitical tensions, and subdued corporate earnings performance.

Market Performance Overview

The benchmark indices have registered significant losses on a month-to-date basis, with broader market segments experiencing deeper corrections.

The correction has been attributed to multiple headwinds including potential Trump tariffs, trade war concerns, and continued foreign institutional investor selling pressure.

Banking Sector Opportunities

Market analysts identify the banking sector as a primary investment opportunity following the recent correction. Santosh Meena, Head of Research at Swastika Investmart, highlighted that private sector lenders have seen their valuations moderate significantly, creating favourable entry points relative to historical averages.

Key Banking Stocks Recommended:

• HDFC Bank
• Kotak Mahindra Bank
• Federal Bank

Analysts expect banking and financial services to serve as primary engines of India's GDP growth, making the sector attractive for long-term positioning.

PSU and Manufacturing Focus

Despite the broader market pullback, the structural investment story for public sector undertakings remains intact. Analysts recommend specific PSU stocks aligned with government priorities including energy security and defence indigenisation.

Defence Sector Prospects

Balaji Rao Mudili, Research Analyst at Bonanza, emphasised the defence sector's potential ahead of Budget 2026. The sector is expected to benefit from higher budget allocation expectations driven by border security requirements and Make in India initiatives.

Defence Investment Drivers:

• Increased security allocation expectations
• Import substitution initiatives
• Global geopolitical tensions
• Indigenisation policy support

Defensive Strategy Recommendations

Analysts recommend a defensive rotation strategy combining safety with strategic long-term positioning. The FMCG sector is suggested as a defensive hedge, offering earnings visibility and portfolio stability during heightened market volatility.

The correction has created value opportunities across sectors, with analysts advising investors to focus on companies with strong fundamentals and alignment with government policy priorities. The combination of defensive positioning and strategic sector allocation is recommended to navigate the current market environment while capitalising on long-term growth themes.