The Indian equity market is currently experiencing a correction, driven by a confluence of factors. Tight liquidity conditions, a depreciating rupee, strong US dollar, weak corporate earnings, and concerns around government capex allocation have all contributed to this downturn.

Understanding the Current Landscape
- Liquidity Crunch: Reduced liquidity in the market has constrained trading activity and increased volatility. The recent RBI measures, including OMO purchases and VRR auctions, aim to address this issue.
- Currency Headwinds: The weakening rupee poses a challenge, impacting imports and potentially eroding corporate margins. The RBI’s USD/INR swap is a significant step towards stabilizing the currency.
- Global Interest Rate Pressure: The continued rise in US interest rates and an inverted yield curve have increased borrowing costs for Indian companies and impacted investor sentiment.
- Earnings Growth Concerns: Disappointing Q2FY25 earnings have dampened market optimism. However, a recovery is anticipated from Q2 FY26 as macroeconomic conditions improve.
- Capex Allocation: While government capex is increasing, concerns remain regarding its allocation towards productive sectors. The upcoming budget may address these concerns by emphasizing growth-oriented investments.
RBI Intervention and its Impact
RBI yesterday addressed Liquidity and Currency Concerns with below measures
- Open Market Operations (OMO): ₹60,000 crore G-Sec purchase to inject liquidity.
- 56-Day VRR Auction: ₹56,000 crore through a Variable Rate Repo to address short-term liquidity needs.
- USD/INR Swap: A $5 billion buy/sell swap for six months to stabilize the rupee and manage forex reserves.
These measures from RBI are crucial steps towards improving liquidity and stabilizing the rupee. These measures are effectively equivalent to a rate cut, demonstrating the RBI’s proactive stance in addressing the current challenges.
Investment Strategy Moving Forward
The next six months are likely to remain volatile. However, this period also presents opportunities for discerning investors.
- Systematic Investing: Continue investing systematically in equity-oriented products. This disciplined approach helps to average out the impact of market fluctuations.
- Diversification: Diversify your portfolio by exploring structured instruments like Market Linked Debentures (MLDs). These instruments offer the potential for stable returns while participating in the upside of the market.
Disclaimer: This blog post is for informational purposes only and does not constitute financial advice.