Nifty 50 approaches 25k: What's driving the Dalal Street and is it entering risky territory?

The Nifty 50, a key index of the Indian stock market, neared the 25,000 mark during Monday's session on July 29 but ultimately settled at 24,836.10 due to profit booking. Shares of HDFC Bank, Bharti Airtel, ITC, Titan, and Kotak Mahindra Bank were the major contributors to this dip.

Despite this minor setback, the Nifty 50 has surged over 14% this year, with even more impressive gains in the mid- and small-cap segments. The Nifty Midcap 150 and Nifty Smallcap 250 indices have both climbed 27% year-to-date.

Drivers Behind the Market Surge

The influx of retail investors has significantly driven the market's rise. The Indian stock market has welcomed millions of new retail investors in recent years, fueling a bullish sentiment. G. Chokkalingam, founder and head of research at Equinomics Research Private Ltd, notes the substantial increase in market participation, with 8-10 lakh new investors entering weekly and the BSE now boasting over 18.3 crore registered investors. In the past year alone, 4.6 crore investors have joined the market.

The robust performance of the Indian economy and optimistic future expectations have further bolstered retail investor confidence. Pankaj Pandey, head of research at ICICI Securities, attributes the market's premium valuations to overall confidence in sustained growth, suggesting this trend will persist barring any significant global disruptions.

Prashanth Tapse, Senior VP (Research) at Mehta Equities, highlights that strong retail capital inflows, both direct and via mutual funds, along with better-than-expected Q1 earnings, are key factors driving market performance. Tapse credits the rise of retail investor participation, particularly through systematic investment plans (SIPs), for maintaining market stability and growth.

Vaibhav Shah, fund manager at Torus Oro PMS, identifies multiple factors contributing to the market's record highs, including India's status as one of the fastest-growing economies, strong domestic institutional investor (DII) flows reducing volatility, and the long-term benefits of capex announcements. Shah also points to the attractiveness of emerging market equities as global interest rates peak.

Is the Market Entering Risky Territory?

Despite the strong performance, experts caution that high valuations across segments could lead to market overheating. Amit Goel, co-founder and chief global strategist at Pace 360, warns that the Indian market is extremely overheated, with a few sectors dominating investor attention. This concentration could weaken the market's long-term profile and make it vulnerable to corrections.

Goel suggests that retail investors' reactions to market volatility could trigger a significant correction. He predicts that even partial collective exits by retail investors could lead to a 10% market drop. Over the long term, Goel views the Indian equity market as a massive bubble driven by blind domestic inflows, warning of potentially catastrophic consequences for the Indian middle class.

Disclaimer: The views and recommendations in this article are those of individual analysts, experts, and brokerage firms. Investors are advised to consult certified experts before making any investment decisions.