Small-, Mid-Cap Rout May Intensify Once Returns Turn Negative, Says Jefferies

The selloff in Indian stocks is "primarily technical in nature", reflecting multiple compressions rather than any drastic macro issues, the report said. Moreover, the selloff has been concentrated in the more high beta domestic cyclical sectors, such as property, infrastructure and industrials, which were the big outperformers last year.

"For now, there is confidence amongst mutual fund companies that these flows will continue, since most are based on monthly instalment SIP schemes," Wood said in the note.

The Modi government has taken a more "populist" turn in its third term, doling out handouts that will be a positive for rural consumption, as well as personal income tax cuts for urban consumers, the note added. It will also be premature to give up entirely on a private sector capex cycle, which is the current mood of the moment, according to Jefferies.

Corporate balance sheets remain underleveraged, and banks are willing and able to lend, it said.

Besides foreign portfolio outflows, Jefferies noted the other negative for the stock market has been credit and monetary tightening which have now ended. At the same time, third-quarter results have been broadly in line with the Nifty fiscal 2025 forecast EPS — broadly unchanged, and downgrading by only 0.4%.

The note also said a renewed interest rate easing by the US Federal Reserve will bring much-needed relief to India.