Budget Week Volatility: Nifty Faces Wild Swings Amid FPI Exodus and Divergent Analyst Views
The Indian stock markets are poised for a week of heightened volatility as trading resumes on Tuesday following the Republic Day holiday. With the weekly expiry of index options coinciding with market reopening, the benchmark Nifty could experience significant price fluctuations during this truncated week leading up to the Union budget presentation on February 1.
Foreign Investors Accelerate Selling Spree
Foreign portfolio investors maintained their bearish stance on Friday, selling a provisional ₹4,113.38 crore in cash markets according to BSE and NSE data. This selling spree has pushed their cumulative net sales in the current fiscal year through January 23 to a staggering ₹1.9 trillion, building upon the record secondary share sales of ₹2.48 trillion recorded in the previous fiscal year (FY25).
Beyond cash market sales, FPIs have significantly increased their bearish positions in the derivatives segment. They raised their cumulative bearish bets on index futures to a record 227,533 contracts despite the extended weekend, while also selling weekly call options on the Nifty to the tune of 29,006 contracts on Friday alone.
Market Performance and Technical Indicators
The persistent foreign selling has taken its toll on market performance. The Nifty has declined 5% from its record high of 26,373.2 reached on January 5, closing at 25,048.65 on January 23. More significantly, the index closed below its crucial 200-day moving average of 25,142.77, which technical analysts interpret as a bearish signal for market direction.
Domestic institutional investors, led by mutual funds, have attempted to counterbalance the foreign outflow with net purchases of cash shares worth ₹6.5 trillion so far this fiscal year. While this substantial domestic buying helped the market recover 15% from its 52-week low of 21,743.65 reached on April 7 last year, it has proven insufficient to sustain the market at its previous highs.
Divergent Analyst Perspectives on Market Direction
Market experts remain sharply divided on the immediate trajectory for Indian equities, creating an environment of uncertainty ahead of the budget announcement.
Bearish Outlook: Rajesh Palviya, research head at Axis Securities, cautioned that "lack of concrete action on an India-US trade deal, relatively high valuations amid a slowdown in earnings growth, and the falling rupee have underpinned FPI selling, and there's more to come." He expects the Nifty to face further downside pressure toward the 24,500 level initially.
Jyotivardhan Jaipuria, founder of Valentis Advisors, highlighted fundamental concerns, noting that "Nifty earnings have grown just 6% in the past six quarters through September 2025, while valuations remain sky high at 20 times one-year forward earnings." He believes the market needs earnings growth to accelerate to 10-12% and a cooling of the AI trade frenzy before sustainable recovery can occur.
Bullish Counterpoints: In contrast, Rajesh Baheti, director of Crosseas Capital, expressed optimism that "the market had likely formed a bottom and could see a sharp jump following the RBI's liquidity measures, Bessent's comments and a likely India-EU trade deal." He anticipates a bounce around current Nifty levels of 25,000 driven by FPI short covering.
Independent market analyst Ambareesh Baliga also suggested the market might be approaching a bottom formation, citing positive sentiment from weekend developments.
Potential Reversal Triggers and External Factors
Several developments over the weekend have introduced potential catalysts that could reverse the current downtrend. Positive comments from US Treasury Secretary Scott Bessent regarding the possible removal of the 25% punitive tariff on Indian imports have generated optimism. This potential tariff relief follows India's significant reduction in Russian oil purchases.
Simultaneously, the Reserve Bank of India announced substantial liquidity infusion measures exceeding ₹2 trillion into the financial system between January 30 and February 12, including dollar-rupee swaps. These measures aim to address liquidity concerns and stabilize the currency market.
The rupee's performance adds another layer of complexity to the market equation. The Indian currency hit a new low of 91.97 per US dollar on Friday, representing a 6.3% depreciation over the past year. This currency weakness has crimped dollar returns for foreign investors, further exacerbating the selling pressure.
Broader Market Context and Comparative Performance
The Indian market's challenges extend beyond domestic factors. According to MSCI data, the MSCI India Index generated a gross return of just 4.29% in the year through December 31, 2025, significantly underperforming the MSCI Emerging Markets Index, which delivered returns of 34.36% over the same period.
India's valuation premium relative to emerging markets has consequently narrowed from twice the level in September 2024 to approximately 55% currently. This compression reflects both India's underperformance and the outperformance of other emerging markets like Korea and Taiwan.
As markets navigate this complex landscape of foreign outflows, currency pressures, divergent analyst views, and potential policy interventions, investors face a critical week that will test the resilience of Indian equities ahead of the Union budget announcement.
