FII Sell-Off Not Abating Anytime Soon, Says This Market Veteran

The July–September's earnings point at the fact that the consumption was really weak. The Finance Minister also alluded to the fact that the purchasing power of consumers is weak, Sonthalia said.

The problem is consumption. To lift the consumption, the Government of India has to increase the demand so sectors like auto and housing finance start to do well, he said

In last four years to 2024, the Government of India has given us stimulus; the country has a fiscal deficit — what did those factors do? The fiscal deficit propelled the capital markets, real estate markets, and leveraged households for discretionary consumption. Then, the government did a lot of infrastructure spending, he said.

What's happening now? The current budget says that the fiscal deficit is required to come down. "I think that's the pain getting felt," he said.

The household leverage that was utilised between 2020 and 2024 is no longer available. Furthermore, the government is not currently in a position to provide generous schemes such as MGREGA, or fertiliser subsidies. They are doing what they can, but they have to be fiscally prudent, Sonthalia said.

The corporates received tax cuts, and their profit swelled. The government has done a heavy lifting. Private capital expenditure did not happen. Now, markets should not expect corporates to do well because they did not do the capital expenditure. Again, the heavy lifting has to be done by the government only, he said.

Markets have witnessed a decline in urban consumption. There was some hope in rural consumption, which has been struggling for the last few years. Tier II banks and non-bank financial services have stated that they need to make provisions for the current situation. "I don't believe this situation will persist for just one quarter. It'll last for a few quarters."

From that perspective, the household is clearly experiencing pain. Therefore, the Indian markets have yielded impressive returns over the past year. It's the time to consolidate. "It's time to protect gains rather than aim for the next 50%, he said.

"Sector rotation will help in protecting investors' gains. India has 57 sectors today. The high beta sectors, which include capital goods, railways, defence, and power, are expected to be vulnerable. These are not selections but allocations. BFSI, pharma, and technology are index heavyweights, he said.

Investors need to go BFSI, pharma, and technologies to protect their gains. One more sector that has done well this quarter is capital markets. These sectors have not undergone any re-rating in terms of multiples.