Date: 30-May-2025.
NIFTY & INDIAN MARKET OUTLOOK FOR JUNE/JULY -2025
– RAHUL VASHISTHA
The market experience for most of the investors has been tumultuous over the past year, with sharp erosion of wealth in the H2FY25 (Oct 24 – Mar-25) followed by some sharp recovery in the Broader Index i.e Nifty & in large-Cap stocks.
Rationale: The underlying idea of this blog is not to time or predict the markets, but to understand the important triggers that can make the markets go up or down which in turn can help the readers of this blog take an informed decision with respect to their investments
USA CONTEXT:
USA roughly contributes to about 24% of Global GDP & Its Market Cap is about 65-70% of Global Market Cap, hence any headwinds to the USA markets affect the equity markets across the globe & India is no exception.
US Bond Market Conundrum
US is witnessing elevated bond yields i.e around 5% for 30 year treasury & 4.5% for 10 year treasury. Higher bond yields are considered not favorable to the equity markets theoretically.
Usually, such a high yield can be attributed to a couple of reasons:
First: lowering of its credit rating; Moody’s has recently downgraded the credit Rating for US. Credit rating can be understood as something like an Individual Credit score or Cibil score (used in India). USA is already reeling under a humongous debt pile of $ 36 Trillion & its GDP is around $ 30 Trillion.
The recent “tax cut” bill that has been passed is expected to add about $ 3-4 Trillion to the existing debt. This has further ruffled up the investors. As a result, the interest payment on debt would be more than the defense spending on an annual basis.
Hence investors are demanding a higher premium to compensate for the additional risk, thus pushing the yields higher.
Second: Investors are expecting the inflation to remain elevated which is created by tariff wars initiated by Mr. Donald Trump. Under monetary policy, higher interest rates are maintained by the central banks to counter inflation. Thus, driving the yields higher.
FAILING of ECONOMIC PRINCIPLES OVER THE SHORT TERM
Theoretically higher Yields should attract high fund flows into the bond market.
The equity market should underperform due to the funds getting reallocated to bond market & also inflation & higher yields lead to lower valuation of equities.
Also, Gold is considered as a hedge against equity, but surprisingly their correlation over the past decade in terms of returns has been extremely high.
In Current Scenario: We are seeing Yields going up, Equities market delivering strong Returns & Gold at an all-time high with phenomenal run over past couple of years. Which are totally against the economic fundamentals.
- So you must be wondering what’s driving this unfathomable equation?
As far as my understanding goes, this is attributable to quantitative easing & money printing by US which was done over the years & especially during covid times, due to which there has been excessive money supply into the system, pushing the returns higher across all the asset classes.
2. Will this equation persist, or can there be a market crash?
Over long term, the economic principles shall withstand which is only possible after a market crash, But timing of market crash is a mystery for everyone, It can happen today or may be three years down the line, But the danger is imminent.
Always remember markets can stay irrational for longer periods than most of the investors can stay rational. This kind of heightened debt level have been sustaining post-covid & yet the markets have been making all-time Highs.
INDIA STORY
RBI RATE CUTS, LIQUIDITY INFUSION, TAX RELIEF & INFLATION:
Repo rate was maintained at 6.5% by RBI at the start of CY25, already 50 bps have been cut so far & anticipation across the street is of a further 50 bps cut, making it 5.5% by the end of CY25.
This quantum of rate cut will be very beneficial for the growth of India’s economy & the capital markets both of which witnessed some slowdown post elections in 2024.
Inflation: The annual inflation rate in India fell to 3.16% in April of 2025, the lowest since July of 2019, from 3.34% in the previous month, and firmly below market expectations of 3.3%. The inflation rate is further below the Reserve Bank of India’s 4% midpoint target. This again provides a positive bias towards the economy & the markets.
Lower crude price & weakening dollar provide additional comfort.
Since December’24 RBI has already infused Rs 10,985 billion into the system with some more infusion expected.
TAX REBATE: GOI’s tax relaxation up to Rs 12 lacs is anticipated To put about a lakh crore of money into the pockets of Indian consumers which in turn should spurt some demand on the consumer sector front which has been reeling under sluggish demand scenario for almost 3 years now.
DISCONNECT BETWEEN NIFTY & SMALL CAP STOCKS
Many of you would be wondering even after sharp recovery in Nifty to the tune of 15% from the bottom your small & mid cap portfolio hasn’t fully recovered & yet the market are again reaching highs, & the pain in your portfolio is still persisting.
Reason for this sharp rally was led by FII pouring money into ETFs, Index & buying large cap stocks, even the fund managers across the street are finding more comfort in the large cap space for the simple reason being the Growth in Large cap is good as compared to small & mid cap space & they are trading at a reasonable price vs mid/small cap.
Many of the stocks across the mid & small cap space are witnessing slowdown in their growth & downward trajectory in their earnings & yet are trading at higher values which are making it uncomfortable for Institutions to pour in the money in this space & hence only partial recovery is witnessed in this space.
This earnings slowdown has been the story in Q3FY25 & even in the recent quarter of Q4FY25 (Jan-Mar’25).
INDIA & NIFTY VALUATION PICTURE
India is currently trailing in the range of 120-125% of Market Cap to GDP, which comes under the overvalued zone. This level had reached almost 140% when the crash happened in October-2024.
Nifty is currently trailing at 24.5x FY25 which is at-least 1 Standard Deviation above its Median of roughly 21 x.
The Nifty Small cap 100 is Trailing at about 32x P/E , which is far higher than Nifty while its growth & earnings outlook is more bleaker vs NIFTY.
NIFTY STRATEGY JUNE- JULY 2025
“Markets are slave of earnings growth”
Markets Abhor uncertainty & like clarity in terms of outlook.
JULY THE CRITICAL MONTH
The 90-day tariff pause comes to an end in July 2025 i.e. next month which is going to be very critical, till then markets can stay range bound with small upsides because of limited foreign flows.
S&P companies have delivered robust result in the recent Jan-Mar’25 quarter, earnings growth were about 28% including tech & 9% excluding tech, so the investors would want to have a more comforting scenario to move their money out of USA.
Volatility is here to stay & will be the theme for 2025.
Nifty is again a bit expensive & mid & small cap are much more expensive at the current juncture.
So majority of the buying would still be witnessed in broader index & large cap vs others & this theme shall continue.
“Readers should wait till the month of July to allow the uncertainties regarding trade war to settle down. Investing at such high valuations amidst heightened volatile scenario can be risky as there are no visible pillars to support this rally for a significant upside.
Either one should wait for some correction to happen in the market or even if the correction doesn’t take place, one should look for strong revival in the corporate profits in the Q1FY26 & sanguine outlook given by the companies for FY26 only then we shall find comfort in buying.”
This is the particular reason why FIIs are not entering aggressively & even MFs are holding significantly higher cash levels which is north of Rs 2 lac crores.
The foreign ownership in US equities is at a all-time high at around 20% & these investors are also looking to diversify & re-allocate their money to Emerging markets like India but are currently hesitant due to the reasons mentioned above.
If Either of the scenarios play out, the market correction or earnings revivals, we can witness further strong rally in the markets later during the year, though many of well-informed investors are pessimistic but this can come in as a surprise.
GOLD: As Long as markets continue to be volatile & there are uncertainties regarding the outlook given the current geopolitical outlook, Gold will continue as a haven for most of the investors, & shall continue to be in upwards trajectory over long term as central banks would continue to buy gold.