Indian market decline reflects deeper growth concerns, says Nomura
Nomura warns that India's market correction reflects structural growth concerns, technological disruption, and shifting global investor preferences.
The recent downturn in Indian equities is no longer just a reaction to volatile crude oil prices or geopolitical jitters. According to a new report from Nomura India Equity Strategy, the market correction is signaling much deeper structural anxieties regarding India's long-term economic trajectory.
While previous market dips were often blamed on immediate external shocks, Nomura suggests that current investor behavior points toward worries over geopolitical realignment, technological disruption, and policy risks that could fundamentally alter India's growth prospects.
A different kind of correction
To understand why this decline is unique, one must look at how it differs from the market correction seen earlier this year. While both episodes were influenced by oil and geopolitics, the "DNA" of the selling has changed significantly:
- The February-March Correction: This was driven by oil-sensitive and domestic sectors. Heavyweights in banking, real estate, automobiles, and oil marketing companies were the primary laggards.
- The August-September Phase: In this recent period, the pattern shifted. IT services recorded the steepest decline, alongside underperformance in non-banking financial companies (NBFCs) and consumer staples, even though their earnings remained relatively resilient.
Interestingly, while crude prices rose, oil marketing companies actually fell less than the Nifty index, suggesting that the market is no longer reacting to oil in the traditional way.
The US advantage and the AI factor
Nomura highlights a significant shift in global growth expectations. The United States is currently benefiting from a massive surge in investment related to Artificial Intelligence (AI), which has tilted the scales in favor of US markets.
The disparity in earnings growth is stark. The report notes that the two-year earnings compound annual growth rate (CAGR) for the S&P 500 stands at a robust 25 per cent, whereas the India BSE 200-plus universe is estimated at just 13 per cent.
The yield spread and capital outflows
Global financial conditions are also tightening. The 10-year yield spread between India and the US has narrowed to 190 basis points—the lowest level in 22 years. This narrowing makes the environment less attractive for foreign capital entering India and other emerging markets. Consequently, Foreign Institutional Investors (FIIs) have been net sellers, offloading USD 12.5 billion of Indian equities in FY27 so far.
Nomura's revised outlook and warnings
Given these headwinds, Nomura has adjusted its valuation models. The brokerage has cut the valuation multiple assigned to the Nifty from 18.5 times to 17 times one-year forward earnings, setting a Nifty target of 24,000 for March 2027.
The report offers several key takeaways for investors:
- Be Valuation Conscious: Avoid "chasing the narrative" and instead favor value-oriented stocks.
- Selective Growth: Remain highly selective when picking growth plays.
- Watch the Divide: While urban demand and credit-financed consumption remain resilient, rural demand continues to be soft.
- Margin Pressures: Elevated commodity and crude prices could squeeze corporate margins in upcoming quarters.
Finally, Nomura cautioned that the market's current consensus—which expects high-teens earnings growth for FY28—relies on optimistic assumptions such as easing geopolitical tensions and falling crude prices. "These assumptions appear optimistic at this stage," the report stated, suggesting that mid-single-digit cuts to FY28 earnings estimates remain a distinct possibility.