Sensex and Nifty witnessed record-breaking moments in 2024 that pleased investors and strengthened optimism. However, in the stock market, what lies ahead is more a matter of concern than what has become history. Although a significant part of 2024 was positive, the last quarter was beset with challenges like sliding Sensex, intensifying geopolitical conflicts, and changing government policies. To say that the Indian stock market will be volatile in 2025 is an understatement. Here are the major factors that will reshape it this year and tips to make informed investing decisions.
1. Challenges Due to Trump's Re-election
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Donald Trump, who is set to reclaim office, has pledged big tariffs on China, Mexico, and Canada. In addition to a 25% tariff on imports from Canada and Mexico, there is an additional 10% tariff on Chinese imports. This can make IT and pharma, the two export-driven sectors in India, face pressure from declined US demand.
Further, a stronger American dollar may be advantageous for export revenues. But it can increase costs for businesses with dollar-denominated debt and cause a lot of volatility in Indian stock markets. The stronger dollar can also depreciate the value of the Indian rupee. Already, the Indian rupee has been struck by a record low of 84.2590 against the US dollar.
The depreciating Indian rupee makes Indian bonds less attractive to investors. For example, if the rupee loses 1.3% to USD and someone invests $10 billion in Indian bonds, they stand to lose $130 million because of the depreciation. Additionally, they will need to safeguard themselves from losing more. This makes Indian bonds less of a good investment option.
2. Geopolitical Tensions and Market Volatility
Presently, geopolitical uncertainties are fragmented because of several reasons, such as the Russia-Ukraine conflict, the Sino-American rivalry, and the war between Israel and Hamas. The issues will impact global trade negatively and make energy prices and inflation soar. Trade disputes and tariff policies will significantly weigh on market sentiments.
Despite the global headwinds above, India's growth rate is set to be between 6.6% and 6.9% in the upcoming financial year Increased domestic consumption and favorable agricultural conditions are two drivers for it.
In such a landscape, investors need to adopt a cautionary approach and diversify their portfolios as much as possible to protect against market dynamics.
3. Sticky Inflation to Decrease Stock Valuations
Consumer price index (CPI)--based inflation has been a little above 5% for a long time. If it is not lowered, there will be a delay in cutting interest rates, and so the stock value will go down. But it's too early now to make an assumption. According to the Finance Ministry, the central bank's monetary policy and macroprudential measures slowed the demand in the economy.
But the fault is not solely of RBI. Stagnant wages and increased household borrowings have a role to play in declining demand. This can be curbed if the government increases capital spending. However, the finance minister, Nirmala Sitharaman, isn't ready for it.
We'll gain clarity over this situation by February when the RBI's monetary policy panel will assemble under the new Governor, Sanjay Malhotra.
4. Potential Capital Outflows Because of US Fed Rate Cut
Another major driver of market uncertainty is the recent US Federal Reserve's 0.25% rate cut and the indications for further reductions. The December rate cuts made Sensex and the Nifty 50 suffer losses of 1% each.
Further, interest rate cuts have a huge potential of making Indian assets less attractive to global investors. It will result in capital outflows because of strengthened USD and increased bond yields.
Still, the interest rate cuts do not spell a total disaster. While sectors sensitive to rate cuts face challenges, export-driven sectors and IT will benefit from a more robust dollar.
Investors should turn their focus on sectors like infrastructure, real estate, and metals as they are bound to gain from reduced borrowing prices. Also, defence sectors like FMCG can witness stability in demand, as well as reduced fluctuations.
Tips for Investors to Stay Resilient
As observed, 2025 can be both turbulent and peaceful for investors. Here are some ways to help yourself move through the challenges effectively.
- Stick to the basic principles of long-term investing over short-term market movements. Hold on to quality stocks ("Buy on Dip" strategy) and eliminate junk or low-quality stocks from your portfolio.
- Until there is an indication of market stability, adopt a calculated or staggered approach. Avoid making a big financial commitment, and instead, start small by purchasing shares of inherently strong companies.
- Gain exposure to gold, as it has a strong hedging ability. It will protect you from sticky inflation, fluctuations in currency, and economic instability.
- Invest in the stocks of growth-driving sectors, like financial services, IT, FMCG, and pharma to get the most returns.
With inputs from agencies
Image Source: Multiple agencies
*The views expressed are personal to the author and do not reflect the platform's opinion of the same.
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Praggya Joshi is a seasoned content writer specializing in creative writing, long-form, and short-form social media content. She has worked in the B2B, SaaS, health, and IT spheres and carries a deep knowledge of building SEO-optimized and user-friendly content strategies. A poet at heart, she finds solace in weaving her thoughts and life experiences into free-flowing verses. Praggya is devoted to honing her craft and tries her best to move past her comfort zone and gain new skills.
