The Nifty 50 index pulled back this year and moved into a correction phase as concerns about valuation, slow growth, and Donald Trump’s tariffs accelerated. The index, which tracks the biggest Indian companies, dropped to 22,255 on Thursday, down by about 14% from the lowest point this year. Here are the top three reasons it may rebound this year.
Reserve Bank of India rate cuts
The first major reason why the Nifty 50 index retreated is that the RBI has started to cut interest rates by 0.25%, moving them from 6.5% to 6.25% in January. It was the first interest rate cut in over 5 years.
Economists and the bond market believes that the bank has more room to cut. The ten-year bond yield dropped to 6.70% on Thursday, down from 7.6% in 2022 as the RBI slashed interest rates. Similarly, the five-year yield dropped to 6.60% from a high of 7.50%.
The case for more rate cuts increased after the latest Indian inflation data. According to the statistics bureau, the headline Consumer Price Index (CPI) fell to 4.3% in January from 5.22% a month earlier. It has dropped in the past few consecutive months.
Indian stocks will likely do well as bond yields drop because of the falling inflation date. Historically, equities tend to rise when the local central bank is cutting rates.
These expectations explain why analysts are still upbeat about the Nifty 50 index. Some of the top analysts who have boosted their Nifty 50 index forecasts are from JM Financial and Jefferies.
March is a good month for Indian stocks
The other bullish case for the Nifty 50 index is that March is typically a good month for Indian equities.
An analysis by Jefferies noted that the index has historically risen in March as it has risen seven times in the last 10 years. While seasonality is not always the best approach to use, analysts note that the Indian stock market has catalysts that may push it higher in the longer term.
Some of these catalysts are the robust government spending in the country and the fact that the government has implemented some tax cuts to stimulate spending this year.
Still, seasonality is not always accurate, and it is common for an asset to buck the trend.
Further, there are signs that Indian investors are not panicking as the Nifty 50 index crashes. The evidence of this is that the VIX index has dropped in the last 6 sessions, a sign that Indian investors are not dumping stocks and moving to the hedges. That is a sign that they expect the market to bounce back.
Nifty 50 index has formed a falling wedge pattern
The other bullish catalyst for the Nifty 50 index is that the Nifty 50 index has formed a falling wedge chart pattern, a popular bullish reversal sign on the weekly chart.
This pattern comprises two falling and converging trendlines. In most cases, the pattern leads to a strong rebound of an asset.
This bullish case is also made by the fact that the Indian stock market has remained above the 100 day Exponential Moving Average (EMA) level. It has also moved above the ascending trendline that connects the lowest swings since June 2022. A rebound will likely push the index to the all-time high of 26,276 rupees.
However, a drop below the important support level at 21,276 rupees will invalidate the bullish view as it will signal that there are more sellers in the market, especially as Donald Trump tariff risks rise.
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