Indian Stock Markets Snap Three-Week Losing Streak Amid Budget Optimism
India's benchmark stock indices have broken a three-week downward trend, buoyed by growing optimism surrounding the upcoming Union budget, selective corporate earnings surprises, and positive developments in the India-European Union free trade agreement negotiations. This shift in sentiment has provided a much-needed lift to investor risk appetite, according to market analysts.
Weekly Gains Contrast With Monthly Losses
The BSE Sensex concluded the trading week on Friday with a notable gain of 0.9%, closing at 82,269.78. Similarly, the Nifty50 index advanced by 1.1%, settling at 25,320.65. Despite this weekly rebound, both benchmarks recorded losses for the month of January. The Nifty50 declined by 2.4% during the month, while the BSE Sensex shed 2.8%, marking their poorest monthly performance since February 2025, when markets corrected by approximately 6%.
Sectoral Performance Highlights Diverging Trends
Budget-linked sectors emerged as clear winners throughout the week. Capital goods, power, defence, and public sector units (PSUs) witnessed significant rallies as investors anticipated increased government spending on defence, sustained infrastructure investments, and accelerated stake sales in PSUs to boost non-tax revenues, as noted by Vinit Bolinjkar, Head of Research at Ventura.
Additionally, oil and gas stocks gained 5-7% over the week, driven by a spike in Brent crude prices to nearly $70 per barrel amid escalating geopolitical tensions between the US and Iran.
In contrast, fast-moving consumer goods (FMCG) and consumer durables sectors were the week's top underperformers, falling 2-3%. Bolinjkar explained that investor concerns centered on potential lack of significant consumption-boosting measures in the upcoming budget. Rising oil prices have also heightened worries about increased input costs, negatively impacting margin-sensitive sectors like FMCG, while inflation risks have raised concerns about weaker purchasing power for big-ticket consumer items.
Foreign Investor Outflows Remain a Key Concern
Despite the weekly gains, foreign portfolio investor (FPI) sentiment remains weak, potentially limiting the market's ability to sustain its recent outperformance. FPIs sold nearly ₹36,000 crore worth of Indian equities in January, marking their largest monthly outflow in a year. This follows substantial equity outflows of ₹78,027 crore in January 2025.
Experts attribute this foreign capital flight to rising global uncertainty, lack of meaningful improvement in corporate earnings, and more attractive artificial intelligence-linked opportunities in other emerging markets. Bolinjkar added that foreign investors remain cautious due to delays in the India-US trade deal and lingering tariff threats.
India-EU Trade Agreement Provides Positive Momentum
In a significant development, India and the European Union concluded negotiations for a landmark free trade agreement on Tuesday. This agreement involves two billion people and creates a $27-trillion market, accounting for 25% of global GDP. India has offered tariff concessions on 97.5% of imports from the EU, while the EU has eliminated tariffs on 99.5% of India's exports.
Currency Depreciation and Monetary Policy Outlook
The rupee's persistent depreciation against the US dollar has further intensified FPI selling pressure. As foreign investors sell domestic equities, demand for dollars increases, weakening the rupee, raising hedging costs, and eroding FPI returns—creating a negative feedback loop that prompts additional outflows. The Reserve Bank of India's intervention to curb the rupee's fall tightens liquidity, making equities less attractive and reinforcing this cycle. The rupee depreciated 2.3% in January, touching an all-time low of 91.88 against the dollar.
Market participants now eagerly await cues from the Union budget, with Bolinjkar noting that any changes in tax structure or sectoral incentives will significantly impact market sentiment. Additionally, the RBI's upcoming monetary policy committee meeting could determine the market's next direction. While the central bank is widely expected to maintain the policy rate at 5.25%, investors will closely monitor its guidance on liquidity management and rupee volatility.
Analysts caution that conviction around a sustained breakout rally remains fragile, despite markets pricing in positive cues from the budget. Pre-budget positioning offered some support this week, helping India rank among the top four global markets alongside South Korea and Hong Kong. However, the underlying weakness in FPI sentiment suggests that the market's ability to maintain this momentum may be limited without stronger fundamental drivers.
