Nifty down 14% from peak; is Indian stock market oversold? Which sectors may lead next leg of rally? Experts weigh in

Indian stock market has been under immense selling pressure since October last year. This has dragged the benchmark Nifty 50 down by over 14 per cent from its record high of 26,277.35 which it hit on September 27.

The broader index, the Nifty 500, has fallen further, down 17 per cent from its all-time high.

Heavy foreign capital outflows, weak corporate earnings, and slowing domestic economic growth are the main factors behind the recent decline.

The Nifty 50 is now on track to close in the red for the fifth consecutive month—its longest losing streak since 1995.

Is the Indian stock market oversold?

Experts are divided on whether the market is oversold.

Ajit Mishra, SVP of Research at Religare Broking, believes the market is oversold. However, it is not able to rebound due to rotational correction in key sectors.

“Markets are certainly oversold, but the rotational correction in key sectors limits the rebound and lowers the index with every passing week. Going ahead, a decisive break below 22,500 in Nifty could extend the decline toward 22,000. To reverse this trend, the index must reclaim and sustain above 23,000,” said Mishra.

According to Devarsh Vakil, Head of Prime Research at HDFC Securities, markets may soon experience some respite.

Vakil underscored that the signs of improvement in macroeconomic parameters suggest that the current softer patch in earnings growth may soon ease. Moreover, the worst of the price deterioration appears to be behind.

“We now enter a period characterised by sectoral rotation alongside time-based correction and consolidation in select equities. These stocks will likely begin their recovery as earnings growth materialises, providing the fundamental catalyst needed for a rally in prices,” said Vakil.

“This transitional phase should offer tactical opportunities as capital shifts between sectors while the broader market establishes a more sustainable foundation,” Vakil said.

However, some experts believe the market is still not oversold, as despite the recent correction, many stocks are still at premium valuations.

“If we ask if it is an oversold market, I would argue it is not. The bull run we saw in the last five years has led to really stretched valuations for many companies. Despite the recent correction, many stocks remain overvalued when you compare their valuations to their prices,” said Abhishek Jain, Head of Research at Arihant Capital Markets.

“Data shows that about 60 per cent of Nifty500 companies are still trading above their five-year PE. That’s why one has to be very careful when picking stocks,” said Jain.

Which sectors may lead the next leg of the rally?

Vakil believes BFSI (banking, financial services, and insurance) should lead the markets higher in the next rally.

He expects credit growth to accelerate as government capital expenditure increases after the elections and the implementation of budgetary proposals.

Vakil finds large banks well-positioned to capitalise on this cycle, though margins may face slight pressure, as RBI’s rate cuts lead to loan repricing while deposit costs remain elevated. Public sector banks stand to benefit from National Company Law Tribunal resolutions and provision write-backs.

RBI decided to reduce the repo rate, to defend Indian rupee from falling sharply, injecting durable liquidity to the banking system, to relax risk weights on loans to NBFCs. Vakil said these steps will likely support BFSI growth going forward.

Jain of Arihant Capital pointed out that the ongoing correction has unveiled numerous investment opportunities.

Talking about the sectors, Jain said there are a few interesting plays that can offer good returns in the long run.

“India’s energy transformation offers a compelling investment opportunity in power generation, transmission, and renewables. Indian IT companies leading the digital transformation are also promising, especially those leveraging AI. Pharma and FMCG companies with a focus on the rural sector also have strong earning potential,” said Jain.

In case of a rebound, Mishra of Religare Broking believes banking, financials, metals, energy, and IT may outperform selectively.

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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.