Market Volatility to Persist Until FPI Selling Eases, Says Shah
India’s stock market remains in a volatile phase, with continued pressure from foreign portfolio investor (FPI) outflows, says Nilesh Shah, Managing Director of Kotak Mutual Fund. While a temporary respite is visible, the broader trend depends on India’s ability to deliver on earnings growth expectations and strengthen its investment narrative.
Market Performance: Temporary Respite or Sustained Recovery?
Shah describes the current market scenario as highly volatile, uncertain, complex, and ambiguous (VUCA). He emphasizes that in the short term, market prices are dictated by investment flows, while in the long run, fundamentals take precedence.
He attributes recent corrections to aggressive FPI selling, which has been driven by multiple global factors, including:
The U.S. pulling capital away from emerging markets under Trump’s “vacuum cleaner” effect.
Expectations of U.S. tax rate cuts, making American equities more attractive.
Global tariff barriers, impacting capital flows.
Lower-than-expected GDP growth in India for September and December 2024, coupled with subdued corporate earnings.
“As long as FPIs are selling aggressively, markets will continue to decline. The moment their selling stops, the market will stabilize. Once buying resumes, markets will start climbing again,” Shah explains.
FPI Behavior: Signs of Change?
Shah highlights that between October and December 2024, four categories of FPIs were net sellers:
Long-only FPIs (mainly from the U.S.)
Insurance and pension fund FPIs
Passive FPIs, which saw redemptions across emerging markets.
Generalist investors, reallocating funds amid global uncertainty.
However, sovereign wealth funds from the Middle East and Scandinavia, along with university endowment funds from the U.S., have been on the buying side.
“One day of FPI buying doesn’t reverse the trend. We need sustained inflows to confirm a shift in sentiment,” he adds.
Retail Investors and Mutual Funds: Navigating Market Volatility
Shah points out a key difference between experienced and new retail investors:
Seasoned investors who have worked with financial advisors continue their SIPs (Systematic Investment Plans) and even look for buying opportunities during market corrections.
New investors, who entered based on recent high returns, are panicking and exiting, leading to wealth erosion.
He urges retail investors to avoid short-term speculation, likening investments to cricket:
“If Virat Kohli gets out, do you drop him from the team? No, you continue backing him. Similarly, don’t judge your mutual funds by short-term losses.”
Shah recommends investors consider diversified products such as:
Equity savings schemes (for conservative investors)
Balanced advantage funds (for moderate risk-takers)
Asset allocation funds (for aggressive investors)
Gold and Other Asset Classes: Where to Invest Now?
Shah remains bullish on gold, citing continued central bank buying, including from China, insurance companies, and Indian households.
“The supply of gold from mining is limited, but demand is robust. The trend suggests prices will continue rising,” he notes.
For risk-taking investors, he advises backing Indian entrepreneurs, highlighting examples from:
CNC machinery manufacturing (competing with China).
Advanced alloys for global turbine manufacturers.
High-quality explosives for domestic and international markets.
A revolutionary 15-minute charging battery startup, which has received little recognition compared to China’s BYD five-minute charging technology.
India’s Investment Narrative vs. China’s Influence
According to Shah, China has mastered the art of narrative-building, much like Acharya Chanakya’s strategy of ‘Saam, Daam, Dand, Bhed’ (Persuasion, Price, Punishment, and Division).
He points out that China strategically promotes its achievements while downplaying its challenges. India, on the other hand, must not only perform but also amplify its success stories globally.
For example, while China’s DeepSeek AI model was marketed as being developed for just $6 million, hidden government subsidies were ignored in global discussions. Meanwhile, India’s 170% earnings growth in Nifty 50 over the last decade has not been widely publicized, compared to China’s 10% growth in the CSI 300 index.
Reforms and Policy Recommendations for India’s Growth
Shah identifies three urgent economic reforms:
Ease of Doing Business:
Reduce bureaucratic compliance burdens on entrepreneurs.
Ensure a level playing field for businesses.
Judicial Reforms:
Strengthen infrastructure for faster case resolutions.
Improve the enforcement of contracts to attract long-term foreign investments.
Factor Market Reforms (Land, Labor, and Capital):
Simplify land acquisition laws to facilitate industrial expansion.
Implement flexible labor laws to support high-employment sectors like garments and textiles (where India lags behind Bangladesh and Vietnam).
Redirect hidden savings in gold and cash into productive investments.
Tariffs and Trade Policy: Striking a Balance
Shah warns against aggressive tariff cuts, which could flood Indian markets with cheap Chinese goods, leading to deflation and economic strain. However, excessive protectionism could also make industries complacent and inefficient.
“We need a balanced approach—enough protection to encourage local businesses, but also competition to keep them globally competitive,” he suggests.
India’s Growth Outlook: The Path to Double-Digit Growth
Shah expects India’s medium-term GDP growth to range between 5-7%, with the potential to reach double digits if:
Business regulations are further eased.
Judicial processes are expedited.
Market distortions in land, labor, and capital are addressed.
Despite global uncertainties, he remains optimistic:
“In markets, pessimists may sound intelligent, but optimists make money. India is one of the best investment destinations because it offers both growth and governance.”
