Are Indian Markets Jittery Ahead of Donald Trump’s Inauguration?

Indian financial markets, like their global counterparts, are no strangers to volatility. With Donald Trump set to begin his second term as US President, concerns over potential protectionist policies and economic decisions have added to market jitters.

“The sentiment towards the Indian market currently is mixed to slightly negative. Most investors continue to like the long-term fundamentals of Indian equities but are cautious about short-term momentum,” said Geoff Dennis, an independent emerging markets commentator.

Dennis pointed out several global headwinds, including rising US bond yields, a strengthening dollar, and concerns about Trump’s trade tariffs. “All of these uncertainties will contribute to higher US bond yields and a higher dollar, both of which are bad for EM including for India. I see global equity maretks as being under pressure during the early months of 2025, which again includes India,” he added.

Persistent FII Selling Puts Pressure on Indian Equities
Foreign Institutional Investors (FIIs) have been net sellers in Indian markets for four consecutive months, offloading a staggering Rs 26,250 crore in January 2025 alone. This persistent outflow has put additional pressure on domestic equities, leading to a sharp decline in key indices like the Nifty50 and BSE Sensex. 'The Nifty50 and BSE Sensex indices have seen declines of 1.98% and 2.10%, respectively, from their December closing levels. Several factors have contributed to this downward trajectory: rupee weakening, FII selling and rising crude prices,' Sugandha Sachdeva, Founder of SS WealthStreet.

According to Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, “The FII strategy of continuously adding to short positions has been successful. Reversion to mean valuations is happening, even in large caps, due to strengthening dollar, rising US bond yields, and weak corporate earnings.”

Despite these challenges, some experts believe the market may see a short-term bounce. Vijayakumar explained, “The market is a bit oversold, which favors a bounce back in the near term. However, this trend, if it plays out, is unlikely to sustain.”

Trump’s Policies and Their Impact on Global Markets
Policy speculation surrounding Trump’s agenda has dominated global markets since his first election. With promises of tax cuts, tariffs, and immigration restrictions, Trump’s policies have driven inflation expectations higher and contributed to rising bond yields.

Ajay Bagga, a market expert, noted, “There is some global good news with reports that the Trump cabinet is proposing gradual tariffs post his inauguration. The US dollar is down, and Chinese stocks are recovering on this news. However, it remains to be seen how these policies will pan out.”

He also added, “It looks like a technical bounce day from hugely oversold levels. Whether this level makes a bottom or we get another ‘sell on every rise’ move remains to be seen.”

Rising Dollar and Crude Oil Prices Amplify Concerns
The Dollar Index has surged to a two-year high near the 110 mark, fueled by optimism around Trump’s "America First" policies. This has made emerging markets, including India, less attractive to foreign investors.

‘The first one is the Dollar Index which has surged to a two-year high near the 110 mark, fueled by optimism over Trump’s "America First" policies. This has made emerging market investments, including India, less attractive to foreign investors, and hot money is seen moving back to the US,' said Sachdeva.

Adding to the woes is a sharp rise in crude oil prices, which recently touched $81.60 per barrel, the highest since August 2024. Fresh US sanctions on Russia’s oil and gas sector have further amplified global supply concerns.

“The key headwind has been rising crude oil prices, where they have advanced to levels of around $81.60 per barrel, the highest since August 2024. The upmove in prices is driven by fresh US sanctions on Russia's oil and gas sector, amplifying global supply concerns,” said Sachdeva.

Domestic Factors Weighing on Investor Sentiment
On the domestic front, India’s weakening economic data and poor corporate earnings have also played a role in the market downturn. Retail inflation has eased to 5.22%, but wholesale inflation has risen to 2.37%, driven by higher manufacturing costs.

“The constant refrain from many voices that the broader market is overpriced is now playing out. There’s more pain likely in mid and small caps,” said Vijayakumar. He advised retail investors to focus on quality large-cap stocks, adding, “Beaten-down large caps offer better opportunities during this correction.”

Union Budget and RBI Policy in Focus
Investors are closely watching the upcoming Indian Union Budget on February 1 for potential reforms and increased capital expenditure. Expectations of relief in personal tax rates and measures to boost infrastructure spending could provide some much-needed support to the market.

‘ On the domestic front, investors are eagerly awaiting for some reforms from the upcoming Indian Union Budget, which is expected to play a pivotal role in shaping market direction and sentiment,’ added Sachdeva. 

Additionally, easing retail inflation has provided the Reserve Bank of India (RBI) room for a potential rate cut in its February policy meeting. Lower rates could boost purchasing power and economic activity, helping stabilize market performance.

What Lies Ahead for Indian Markets?
Despite the current challenges, market experts believe there is scope for selective opportunities. “Markets have been sliding lower since the fourth quarter of CY25 and are already in their fourth consecutive month of losing. Amid market volatility, a cautious and strategic approach is essential. It would be prudent to focus on high-quality stocks with strong fundamentals rather than broad sectoral plays. It is advisable to avoid overconcentration in a single sector or stock. Investors should also keep a close watch on Trump’s policies, global macroeconomic trends, and domestic economic indicators, which could influence market movement,” advised Sachdeva.

She highlighted sectors like defence, infrastructure, and IT, particularly companies focusing on artificial intelligence, as potential beneficiaries of upcoming reforms.

Looking ahead, Indian markets are likely to remain under pressure during the early months of 2025. The trajectory will depend on global developments, including Trump’s policies, the US Federal Reserve’s stance on interest rates, and domestic economic indicators.