Expert view: Indian stock market may remain range-bound this year

The Indian stock market has seen a sharp divergence between foreign portfolio investors (FPIs) and domestic institutional investors (DIIs) so far this year.

This year, FPIs have withdrawn nearly ₹2,59,115 crore from Indian equities till 10 July, as per NSDL data. Domestic investors, led by systematic investment plans (SIPs) have contributed almost ₹4.8 lakh crore, absorbing the FPI selling pressure.

The growing domestic participation has undoubtedly strengthened India's equity market.

However, experts underscore that it would be premature to assume that this support can completely offset foreign capital outflow.

"The retail base has not yet been tested through a prolonged and meaningful market drawdown. A market that has not broken is not necessarily one that cannot break. Domestic liquidity provides stability, but it should not be mistaken for a substitute for long-term global capital," Nikhil Chawla, Managing Partner and Co-Founder, xMultiplied Capital Advisors, observed.

"A potent combination of stretched global tech valuations and an unexpectedly hawkish Federal Reserve is creating a challenging stretch for Indian equities. If a recovery is to come, it will not be facilitated by external developments. It will have to be earned through stronger domestic fundamentals, better execution, and more attractive valuations," said Chawla.

Chawla believes the Indian stock market may remain range-bound this year as three important forces reshape the investment landscape: the global technology reset, India's near-term economic slowdown, and the long-term shift towards the country's physical economy.

The rally in global technology stocks, which has been largely driven by optimism surrounding artificial intelligence (AI), seems to be ebbing as the macroeconomic environment becomes increasingly challenging.

The US Federal Reserve's decision to maintain a restrictive stance in view of persistent inflation has not only pushed up the cost of capital but also reduced the appeal of highly valued growth companies.

However, June's soft jobs report, just 57,000 new positions against expectations near 115,000, with the prior two months revised down, has taken a near-term rate hike largely off the table, without reopening the door to cuts.

As per Chawla, this is a higher-for-longer hold rather than an imminent tightening, which keeps capital costs elevated for exactly the companies priced most richly.

As investors reassess risk, sectors trading at premium multiples are likely to face the greatest valuation pressure.

Due to the Middle East conflict and crude oil volatility, the Indian economy could be entering a softer phase.

The Asian Development Bank (ADB) has cut India's economic growth forecast for the fiscal year 2027 (FY27). ADB lowered its GDP growth forecast for India to 6.6% from the 6.9% projected in April.

The recent energy shock from the Middle East conflict is still feeding through to input costs and inflation, even as crude prices are falling back toward pre-war levels on a reopening of the Strait of Hormuz and progress in US–Iran talks.