Markets to watch Indo-Pak developments, earnings

WEEK AHEAD

The Indian markets are likely to remain volatile this week as geopolitical tensions between India and Pakistan continue to weigh on investor sentiments. Participants will closely monitor global cues, ongoing January-March quarter (Q4) earnings announcements, and developments related to US trade negotiations. Foreign Institutional Investors (FIIs) extended their buying streak with inflows of Rs 11,656 crore this month till date, offering some support to the market.

The spotlight will remain on the fourth-quarter earnings season, with major companies such as Tata Steel, Tata Motors, Bharti Airtel, and Hindustan Aeronautics set to declare results. Additionally, investors will track key macroeconomic indicators, including India’s Consumer Price Index (CPI) and US industrial production data, for clues on global economic health. 

Last week, the Nifty ended at 24,008 (down 1.4%), dragged by escalating India-Pakistan tensions. Broader markers too fell, with Nifty Midcap100 and Smallcap100 indices down 0.9% and 2.2%, respectively. Market sentiment took a hit after major escalation in cross-border tensions. India Vix (volatility index or fear index) surged 18.5% during the week to 21.63 levels, indicating heightened investor caution.

Defense stocks were in momentum on the back of expectation of increased strategic focus and higher government spending, while hotel and aviation stocks declined, anticipating operational disruptions and reduced travel demand.

On the global front, The United States Federal Reserve decided to keep the key benchmark interest rates unchanged amid global uncertainty caused by the raging trade war, a slowing economic growth in the nation, and unstable inflation trends. 

In a major development, India and the United Kingdom have finalized the Free Trade Agreement (FTA), after over three years of negotiations. The FTA is poised to elevate bilateral trade to $100 billion by 2030. Key Indian sectors like pharmaceuticals (easier approvals for generics), textiles (tariff elimination), and alcoholic beverages (halved import duties on Scotch) stand to gain. Auto, gems, jewelry, and agriculture sectors may also benefit from improved UK market access. 

The US and Britain also announced a limited bilateral trade deal that aims to reduce tariffs on certain products like steel, aluminum and aircraft engines while keeping the base 10% tariffs on most British exports including cars. The UK’s average tariffs on US goods will be reduced from 5.1% to 1.8%, benefiting approximately 2,500 U.S. products.

Of the 27 Nifty firms that reported results by May 5, 2025, earnings grew 4% year-on-year, surpassing our estimates of 2% growth. Among the MOFSL-tracked companies, 109 have reported results so far, where profits rose 6% against an expected 2% decline. The earnings growth was fuelled by Metals, Technology, Banking, Insurance and Financial Services, and Oil & Gas. In contrast, earnings growth was hit by Real Estate, PSU Banks, and NBFC Non-Lending.

While geopolitical risks and global macro trends may dominate short-term moves, sustained FII inflows and sector-specific tailwinds from the India-UK FTA could offer stability Further progress on US deal negotiations could offer greater clarity to the markets. Investors need to watch out for developments on the geopolitical front as any escalation would impact market sentiment.

(The author is Head of Research, Wealth Management, Motilal Oswal Financial Services Ltd)