When stock markets reopen on Tuesday, coinciding with the weekly expiration of index options, the benchmark Nifty may experience significant price movements.
Market Outlook Ahead of the Union Budget
In the week leading up to the Union budget on February 1st, which was shortened by the Republic Day vacation on Monday, there are conflicting opinions regarding the direction of the market.
With the Nifty dropping below its critical 200-day moving average due to ongoing selling by foreign portfolio investors and a declining rupee, some analysts predict that the downturn from earlier this month will continue, while others think the benchmark is nearing its bottom and may see a comeback.
Potential Catalysts for Market Rebound
Potential catalysts for a turnaround include the Reserve Bank of India’s ₹2 trillion-plus liquidity measures announced on Friday, as well as a prospective rollback of punishing US tariffs on Indian goods.
This week, investors will also monitor the actions of foreign portfolio investors (FPIs). According to BSE and NSE statistics, FPIs sold a provisional ₹4,113.38 crore in cash on Friday. Despite the long weekend, they also increased their total bearish bets on index futures to a record 227,533 contracts.
FPI Activity and Market Impact
According to depository and exchange data, Friday’s sale brought their total net sales for the current fiscal year through January 23 to ₹1.9 trillion. Their secondary share sales reached a record high of ₹2.48 trillion in the preceding year (FY25).
The Nifty has dropped 5% from its record high of 26373.2 on January 5 to 25048.65 on January 23, when it closed below its critical 200-day moving average of 25142.77, despite mutual fund-led domestic institutional investors absorbing the FPI selling. Analysts interpret this as a bad signal.
📉 FPI Selling & Nifty Volatility
- FPI Cash Sales: ₹4,113.38 crore (Friday)
- Total Net Sales FY26: ₹1.9 trillion
- Index Futures: Record 227,533 bearish contracts
- Nifty Levels: Dropped below 200-DMA to 25,048.65
- DII Purchases: ₹6.5 trillion in cash shares
- Market Concern: Rupee weakness, high valuations
Diverging Expert Opinions
Despite “positive” remarks made by US Treasury Secretary Scott Bessent on Friday that the 25% punitive tariff on India might be lifted in response to a sharp decline in Russian oil purchases and the RBI’s infusion of over ₹2 trillion in liquidity into the financial system between January 30 and February 12, including a dollar-rupee swap, Palviya anticipates that Nifty will initially face more downward pressure until 24500.
However, Rajesh Baheti, director of Crosseas Capital, thinks that with the RBI’s liquidity measures, Bessent’s remarks, and a potential trade deal between India and the EU, the market had probably established a bottom and may witness a big jump.
Analyst Perspectives on Earnings and Valuations
“I think we should form a bottom around current Nifty levels (25,000) and rally following FPI short covering due to the RBI measures and positive news on tariffs over the weekend,” Baheti continued.
“Nifty earnings have grown just 6% in the past six quarters through September 2025, while valuations remain sky high at 20 times one year forward earnings,” says Jyotivardhan Jaipuria, founder of the portfolio management services firm Valentis Advisor. Jaipuria believes that Nifty may experience further declines until earnings growth picks up amid moderating valuations and the AI trade frenzy. Jaipuria stated, “We need to see earnings pick up to about 10–12%, which should happen later this year, and a cooling off of the AI trade.”
💹 RBI Liquidity & Trade Impact
- Liquidity Injection: ₹2+ trillion by RBI (Jan 30–Feb 12)
- US Tariff Relief: Positive remarks by Scott Bessent
- EU Trade Deal: Potential upside trigger
- Market Implication: Possible Nifty bottom around 25,000
- Expert View: Ambareesh Baliga sees optimism; Rohit Srivastava anticipates more declines to 24,000
Global Comparisons and Currency Pressure
He continued by saying that although India’s valuation premium to emerging markets (EM) had decreased from twice the level in September 2024 to about 55% at the moment, this was mostly because EMs like Korea and Taiwan had performed better.
In fact, according to data from global index provider MSCI, the MSCI Emerging Markets return increased by 34.36% during the same period, while the MSCI India Index had a gross return of 4.29% in the year ending December 31, 2025.
The sharp decline of the rupee, which cramped FPI dollar returns and touched a new low of 91.97 per US dollar on Friday—down 6.3% over a year—is another reason for investors to be concerned.
Options Activity and Technical Indicators
FPIs are selling weekly call options on the Nifty, which expire on Tuesdays, in addition to cash sales and shorting index futures. They sold a total of 29,006 contracts on Friday, which is another negative indication.
Frequently asked questions
1. Why is market volatility anticipated before to the Budget?
The Republic Day holiday shortens the week, index options expire on Tuesday, FPIs continue to be active sellers, and there is still uncertainty ahead of the Union Budget on February 1.
2. What is the significance of Nifty breaching below the 200-day moving average?
Closing below the 200-DMA (about 25,143) is regarded as a bearish technical indicator, suggesting that there may be more declines unless there is significant buying.
3. Why is there a lot of FPI selling?
Among the main causes are:
Rupee weakness hurts dollar returns
High market values in the face of sluggish earnings growth
Uncertainty regarding commercial relations between the US and India
Improved performance in comparison to other developing markets
4. What might cause the market to rebound?
Among the potential triggers are:
RBI’s pumping of more than ₹2 trillion in liquidity
Possible reduction of US import duties on Indian goods
FPIs’ short-covering
Developments in trade negotiations between India and the EU
5. What levels on the upside and downside are experts keeping an eye on?
A pessimistic outlook: Nifty may drop below 24,500–24,000
Bullish view: If favorable triggers appear, the Nifty may create a bottom around 25,000 and then rise.
Conclusion
Ahead of the Union Budget, the Indian equities market is about to enter a high-volatility phase characterized by significant FPI selling, technical weakness, and macro uncertainty.
Analysts are still divided, despite the fact that RBI liquidity measures and possible improvements in international commerce offer hope for a recovery. Investors should be cautious in the immediate future as the Nifty is expected to remain range-bound with violent swings until earnings growth improves and FPI flows normalize.
Disclaimer:
This content is for informational purposes only and does not constitute financial advice. Please consult a qualified financial advisor before making any investment decisions.
