Indian stocks' worst run in 29 years, wiping $1 trillion in wealth, may yet have legs

By Bharath Rajeswaran, Vivek Kumar M and Indranil Sarkar

(Reuters) - India's NSE Nifty 50 is set for its fifth straight monthly loss - its longest such streak since 1996 - making India the worst performing global market, with investors and derivative markets signalling the pain is likely to linger.

Weak earnings, persistent foreign outflows and uncertainty regarding U.S. tariffs have dragged the Nifty about 15% lower from its September peak, eroding nearly 85 trillion rupees (nearly $1 trillion) in investor wealth.

"In the current scenario of U.S. tariff uncertainty, Indian markets will struggle a bit more," said Mahesh Patil, chief investment officer at Aditya Birla Sun Life Asset Management Company, which manages equity assets worth about $46 billion.

While there could be brief rallies because of oversold conditions, "India will remain a sell-on-rise market for a few more months," Patil said.

Foreign investors have sold Indian equities worth about $25 billion on a net basis since the end of September, of which $4.1 billion was in February.

Local institutional investors have remained net buyers due to strong retail interest but inflows are slowing, Pratik Gupta, CEO of Kotak Institutional Equities, said in an outlook note this week.

Overall net inflows continue but "most local mutual funds, insurance, and portfolio management funds are seeing a slowdown in their equity inflows," he said.

Small-cap and mid-cap stocks have been hit harder than large caps. In February, the Nifty small-cap 100 and mid-cap 100 indices have plunged 13.2% and 11.3%, respectively. This has brought them 26% and 22% below their record high levels last year, respectively.

Flows are moving towards safer large-cap equity funds or balanced debt-equity funds now compared to a rush to invest in small- and mid-cap funds till last year, Gupta said.

"Selling pressure will continue to prevail in small-caps and mid-caps. Investors will stay away and wait and watch; there won't be strong buying support in the next month or two," Patil said.

DERIVATIVE POSITIONING

Positioning in the derivative market has also been signalling risk of further losses.

High-net-worth (HNI) individuals and retail investors have cut long positions, while foreign investors - though adding longs in stock futures - have hedged them with index shorts, data from IIFL Securities and Nuvama Alternative & Quantitative Research showed.

Open interest (OI), which tracks outstanding futures contracts, declined across both the Nifty 50 and the broader market, reflecting weak conviction among traders heading into March.

With the 22,800 level now acting as resistance for the benchmark Nifty 50, analysts at both the brokerages see further downside.

IIFL Securities' Sriram Velayudhan expects a drop to 21,800, while Nuvama's Abhilash Pagaria predicts the Nifty trading between 22,000 and 22,900 in March.

($1 = 87.3825 Indian rupees)

(Reporting by Bharath Rajeswaran, Vivek Kumar M and Indranil Sarkar in Bengaluru; Editing by Janane Venkatraman)