The Great Divide: When the Mood Overtakes the Math
Introduction
In recent months, Indian markets have experienced a remarkable divergence between market sentiment and economic fundamentals. Events that typically arise during macroeconomic distress are occurring in an environment that remains fundamentally robust. This article explores the underlying factors driving this disconnect and how they may influence market dynamics as we approach 2026.
Currency Shock: A Closer Look at the Rupee
– The Indian rupee has reportedly depreciated by approximately 4.5% against the US dollar this calendar year.
– However, this figure is misleading. The US dollar itself has weakened by nearly 10%, making the rupee’s comparative underperformance a staggering 14-15% against other currencies.
– Against the Euro, for example, the rupee has depreciated by over 16%, marking it as one of the worst performers globally.
Foreign Institutional Investors (FIIs) Selling: Unprecedented Trends
– While the headline figure for FIIs selling is reported at $18-19 billion for the calendar year 2025, the context is vital.
– This figure follows $8 billion in primary market inflows this year and an additional $18 billion in selling during October and November last year.
– Cumulatively, FIIs have offloaded over $44 billion in the secondary markets over the past 15 months, a scale rarely seen in Indian market history.
Broader Market Turmoil: A Hidden Crisis
– Although the Nifty and Sensex hover near all-time highs, a significant portion of the broader market faces severe challenges.
– Nearly 50% of stocks in the broader market have fallen 40-50%, many reverting to their 2023 levels.
– Despite the Nifty yielding over 9% in rupee terms this year, returns in dollar terms have remained muted, while global markets have experienced returns exceeding 20% in many cases, with countries like Korea seeing gains of nearly 80% attributed to AI-driven investments.
Bond Market Reactions: An Inexplicable Rise
– Beyond equity markets, bond yields are also fluctuating unexpectedly. Despite the RBI’s 125 basis points rate cut since February 2025 and continued liquidity injections, the 10-year G-sec yield has climbed back to 6.6-6.7%—nearly where it was before the easing cycle began.
Are We in Crisis or Experiencing Irrational Dislocation?
– Given the robust indicators of India’s macroeconomic environment—such as manageable twin deficits, strong forex reserves, GDP growth, and a favorable inflation/interest rate outlook—one must question the validity of the market’s current sentiment.
– Recent policy initiatives, including GST 2.0 reforms, new labor codes, 100% FDI in insurance, and reforms in nuclear power and oil & gas exploration, indicate a significant momentum toward reform.
– Critics may attribute this push to pressures from stalled trade deals, but the urgency in policymaking could enhance India’s structural growth potential.
Math vs. Mood: Understanding the Disconnect
To grasp the disparity between macroeconomic fundamentals and market sentiment, one must reflect on recent market history since the September 2024 peak:
– Economic growth slowed due to election-related spending pauses, adverse weather conditions, and liquidity tightening.
– The reality check during the Q2 earnings season prompted FIIs to sell aggressively—a move exacerbated by fears surrounding a delayed US-India trade deal.
Looking Ahead to 2026: What Can Investors Expect?
As we approach 2026, several factors could reshape the market landscape:
– An anticipated slowdown in AI investment flows could reverse some capital flight, benefiting Indian markets perceived as a diversification opportunity.
– The rupee, currently undervalued at a REER of 98, suggests limited downside potential and possible appreciation, acting as a catalyst for FII return.
– Positive sentiment may further intensify if the anticipated US-India trade agreement materializes.
Conclusion: Will Math Finally Overcome Mood?
The disconnect between market valuations and sentiment poses a compelling question: will 2026 mark the year when Math finally overtakes Mood? With ample opportunities across sectors and a potential revival in FII flows, the landscape appears ripe for strategic, disciplined investment. Only time will reveal the outcome of this great divide.