GR Exclusive: "US Tariffs On India Can deepen Market Fall," Says Sneha Poddar, Research VP at Motilal Oswal

The Indian stock market has been experiencing a prolonged downturn, with major indices declining for five consecutive months since October 2024. This trend mirrors a similar sell-off last seen in 1996. In September 2024, the market reached an all-time high, but high valuations and external pressures, such as American tariffs, have since contributed to the decline. This downturn has significantly impacted investors in the smallcap and midcap sectors.

In February 2025 alone, the Sensex and Nifty indices fell by 5-6%. The smallcap index has dropped approximately 28% from its peak. Foreign institutional investors (FIIs) have withdrawn over Rs. 1 lakh crore in just two months of 2025, exacerbating the market's decline. The ongoing correction raises questions about its duration and potential investment opportunities.

Sneha Poddar, Research VP at Motilal Oswal Financial Services, explains that the market correction began due to high valuations and earnings slowdowns. Additional factors include macroeconomic fatigue and the tariff war initiated by Donald Trump. The dollar index reaching an all-time high also contributed to foreign investors' discomfort, leading to continuous selling.

Domestically, largecaps have reached fair valuations, but midcaps and smallcaps remain at a premium. Consequently, volatility is expected to persist in these sectors. Earnings slowdowns are anticipated for the coming quarters as domestic consumption declines. Global uncertainty due to tariffs further complicates predictions.

A short-term relief rally in the Nifty is possible if the US provides tariff relief, especially after counter tariffs from Mexico, Canada, and China. However, US tariffs on India set to take effect from April 2 could deepen the market decline by March's end. Clarity on these tariffs will be crucial for future market movements.

The Nifty could potentially slip to levels of 21,800/21,300 based on fair valuations. While bearish sentiment might push it lower temporarily, significant declines beyond these levels seem unlikely unless triggered by adverse news.

Foreign Investor Activity

The timeline for FIIs becoming net buyers again is uncertain due to various global factors like interest rates and potential tariffs on Europe and other emerging markets. Domestically, earnings sentiment remains weak. However, FIIs might return in the second half of April when earnings stabilize and valuations become more attractive.

Impact of Capital Gains Tax

The increase in capital gains tax has had a short-term impact on selling by foreign investors. However, this change was anticipated by the market and is already factored in. More critical factors for FIIs include the US dollar's level and interest rate scenarios.

Sectoral Focus Amid Decline

The government's emphasis on reviving consumption suggests potential recovery in consumer discretionary sectors like jewellery, retail, travel, and auto. Rural recovery is underway, while urban areas may soon follow suit. In terms of investment opportunities, the BFSI sector offers comfortable valuations with banking and NBFC segments showing promise post-RBI rate cuts.

Investment Advice for Investors

Sneha Poddar recommends Varun Beverages as a short-term pick due to strong volume upticks with summer approaching. Despite competition fears from Reliance's Campa Cola launch, multiple players can coexist in this space. The company is expanding rapidly in African markets.

ICICI Bank is another recommendation due to its consistent strong quarterly results and maintained asset quality. The bank is gradually shifting towards a higher-margin lending portfolio.

As FY26 begins, stability is expected for a few months before potential corrections due to unsupportive earnings. Key events include clarity on Donald Trump's tariff policy and geopolitical stability affecting oil prices beneficially for India as a net importer.