Strong headwinds and likely tailwinds to keep the market volatile in 2025

The post-Covid recovery in the market has given excellent returns to investors. In less than five years, Nifty has more than tripled and the broader market has impressively outperformed. Going forward, there are some strong headwinds, particularly external, which might impact the market. There are tailwinds, too, which can prevent a sharp correction in the market and support it from a potential bear onslaught. Strong dollar and rising US bond yields are threats In early 2025, the strongest headwind facing the market is the US macros. The Trump trade has pushed the dollar index up to above 108 in early January. Perhaps, more importantly, the US bond yields have been steadily climbing up and are hovering above 4.5 per cent in early January. 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Most developed and emerging market currencies have been steadily depreciating against the dollar in response to the bull run in the US markets, and the pace of currency depreciation has gathered momentum after Trump’s victory in the US presidential elections. Depreciating currencies can trigger more capital outflows from emerging markets like India, further impacting market sentiments. The high US bond yields have the potential to trigger more FII selling in India. The important question is: Why should FIIs invest in an expensive Indian market when the 10-year US bond is yielding a risk-free return of 4.5 per cent? Valuation is the key deterrent The Indian market continues to be one of the most expensive markets in the world. Nifty at 24,000 is trading around 20 times estimated FY26 earnings. This is higher than the long-term (10 to 12 year) average PE of about 18 times. Since the US economy continues to be surprisingly resilient and many other markets – developed and emerging – are relatively cheaper compared to India, FIIs are likely to continue selling in India. FIIs are buying low and selling high An important feature of FII activity in 2024 had been their dualistic behaviour. They sold heavily in the cash market through exchanges; but were consistent buyers in the ‘primary market and others’ category. In CY 2024 FIIs sold equity for Rs 1,21,210 crore through the exchanges. But they invested Rs 1,21,637 crore through the primary market, mainly through the QIP route. Therefore, the net figure for CY 2024 is buying for Rs 427 crore. (Source: NSDL) The conclusion is simple: the key to FII behaviour is valuation. They have been selling in the highly-valued secondary market and buying in the fairly-valued primary market. This distinction is important since the popular perception is that FIIs are leaving India. Good news on the economy and earnings can change the trend The trend of FII selling in the cash market is likely to continue in the context of a resilient dollar and attractive US bond yields. A change in this trend can be caused by two sets of factors: One, decline in the dollar and the US bond yields, two, positive news on India’s growth and corporate earnings. The latter is likely in early 2025. (The author is Chief Investment Strategist, Geojit Financial Services ) ( Disclaimer : Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times) (You can now subscribe to our ETMarkets WhatsApp channel )