Pulse of the Street: Dalal Street’s winning streak faces an inflation test

MUMBAI: Indian equities extended their winning streak to a third consecutive week, supported by stronger corporate earnings and sustained foreign buying. But the rally lost momentum, with rising inflation and continued domestic institutional selling raising questions about its durability.

The Nifty fell 0.6% on Friday to close at 25,144.30, while the Sensex declined 0.4% to 81,592.44. For the week, however, the indices gained 0.45% and 0.69%, respectively, following a nearly 9% surge in the previous week.

Improving earnings offered support, with capital goods, financial services and realty stocks leading sectoral gains. But persistent domestic institutional selling and uncertainty over interest rates suggest the market faces a tougher test after its sharp rebound.

The performance marked a sharp improvement from Q1FY27, when revenue grew 18.6% and profit 9%. In Q2FY26, revenue and profit had increased 6.1% and 12.2%, respectively.

Nikunj Saraf, chief executive officer of Choice Wealth, said the durability of earnings growth mattered more than a single strong quarter. He favoured banking and financial services, automobiles, capital goods and industrials, citing domestic demand, credit growth and infrastructure spending.

“However, investors should remain selective, as earnings growth is not uniform across sectors,” he said.

Kranthi Bathini, director of research at WealthMills Securities, said companies had delivered encouraging results despite geopolitical uncertainty. Easing tensions could help them report better numbers in the coming quarters, he added.

Capital goods lead, IT retreats

Capital goods stocks led sectoral gains, rising 3.2% during the week. Financial services followed with a 2.7% gain, while realty and healthcare advanced 2.6% and 2.4%, respectively. Information technology fell 2.6%, while metal and utilities declined 0.7% and 0.2%, respectively.

Bathini attributed the weakness in IT stocks to sector rotation, saying the sector was consolidating after leading the initial rally.

India's gains trailed those in several Asian markets. Taiwan's Taiex rose 10%, Japan's Nikkei 225 gained 6.5% and South Korea's Kospi advanced 4.5%. Hong Kong's Hang Seng, however, fell 3.4%.

Global technology investors also faced uncertainty after Nvidia announced Jensen Huang's resignation as chief executive and named chief financial officer Colette Kress interim CEO. Its shares fell 4.3% to $166.19 on Thursday.

Foreign buying, domestic selling

Foreign portfolio investors bought ₹21,653 crore of equities during the week, while domestic institutional investors sold ₹21,938 crore, underscoring the divergence between the two groups.

Saraf said foreign investors appeared to be responding to relatively attractive valuations and improving global risk appetite. Domestic institutions, meanwhile, could be booking profits or reallocating money to other opportunities.

He cautioned against interpreting domestic selling as a loss of confidence in India's growth prospects.

Bathini also played down concerns, saying domestic institutions could be building cash after two years of sustained buying. Some investors had bought at lower levels and could now be booking profits, leaving them with funds to deploy during a market correction. “It's not a worrying factor,” he said.

Inflation test

The rally faces another test from rising inflation. Retail inflation rose to 6.09% in October from 5.54% in September, breaching the Reserve Bank of India's (RBI) 6% upper tolerance limit. Food inflation climbed to 8.94%, adding pressure on household budgets.

The reading has put the RBI's December monetary policy review in focus. Higher borrowing costs could weigh on consumption and investment just as corporate earnings are gaining momentum.

Saraf said another 25-basis-point rate increase remained a strong possibility if food and underlying inflation stayed elevated. “For equity markets, this could trigger near-term volatility, especially in rate-sensitive sectors such as banking, automobiles and real estate,” he said.

RBI raised interest rates by 25 basis points in the first week of October and shifted its monetary policy stance to calibrated tightening.

The rupee stood at 94.15 against the dollar on Friday, while crude oil was quoted at $94.63 a barrel. Lower oil prices offer some relief to India's import bill, although a weaker currency erodes part of that benefit.

Bathini said easing crude prices could give the RBI room to hold rates, with its decision depending on incoming data and oil prices.