Market Reversal Soon? Morgan Stanley, BofA Are Divided

Revival of once-bullish Indian stocks is a debate among even the top analysts as companies have lost nearly $1.2 trillion in market cap. However, there is a consensus that Inflows via global funds will not trigger the comeback in domestic stocks.

The benchmark NSE Nifty 50 and the BSE Sensex have fallen 13.3% and 11.7% respectively from the previous peak, triggering the worst fall since 2020.

While global funds are on a record exodus, their domestic peers are keeping the markets afloat with buying on dips. Foreign institutional investors have offloaded stocks worth Rs 1.16 lakh crore in 2025 and sold stocks worth Rs 3.04 lakh crore since September. So far this year, domestic funds have bought equities worth Rs 1.12 lakh crore, according to data from the National Stock Exchange.

During the same period, the small and mid-cap indices fell as much as 22.5% and 18.4% respectively. India stocks' overall market cap has plunged nearly $1.2 trillion since its peak last year to $3.99 trillion, according to Bloomberg data.

Stocks are under pressure as two key macroeconomic events failed to lift investor sentiment. The Union budget's Rs 1-lakh-crore tax sops and the central bank's liquidity push — which analysts said would boost the market — remained non-events.

Amid this, retail investors are bleeding the most from their small-cap bets — the darlings that turned dangerous this year. As these mom-and-pop investors await for their portfolios to turn green, top brokerages give mixed answers.

India's recent underperformance could reverse in the coming months. The budget was a strong push for growth with rising capital expenditure and falling subsidy expenditure, as well as a slower pace of fiscal consolidation than the previous 12 months, Morgan Stanley said in a note last week.

The Reserve Bank of India has pivoted policy with a rate cut, commitment to liquidity and a foot off the regulatory overburden on the financial sector. Credit growth is likely to turn from here, which in turn should support an acceleration in growth, according to Morgan Stanley.

However, Bank of America expects Indian stocks to remain weak in the rest of the year, as global and domestic headwinds continue to weigh on the market.

The brokerage cut the target for the key gauge NSE Nifty 50 to 25,000 for December 2025 from 26,500 earlier, implying a 9.5% upside from the previous close. The correction is playing out as expected and 2025 is expected to stay weak, according to analysts at BofA.

Continued earnings downgrade, US policy uncertainty, moderating capital expenditures, weak foreign institutional flows, risk to domestic flows and rich valuations are key risks for the market, it said.

What brokerages seem to agree on is that inflows via global funds will not be the trigger for the revival, given that their ownership has fallen to multi-year lows.

Strong US bond yields, likely rupee depreciation, delayed Fed cuts and likely strong US equities are expected to keep foreign flows weak.

Global funds ownership of Indian equities has fallen to multi-year lows, while domestic flows continue to remain strong, backed by rising allocation by households into equities, BofA said.

Foreign portfolio investors are on edge with slow growth and elevated US bond yields and forex pressures. The consumption-oriented proposals in the recent budget may not be enough to turn around the downbeat sentiment, HSBC said.

Foreign outflows are already at levels seen in previous intervals of the FII selling, but the 2021–2022 period shows they have room to sell more, it said.

If not FII liquidity, what then? Morgan Stanley answers that.

Flows hardly predict prices, and they are net zero because every buyer has a seller. "What matters for share prices is liquidity, not flows and, for sure, liquidity is not the same as flows," Morgan Stanley said. And, the source of liquidity is "confidence in growth and macro stability."