Market In May; Mid & Small caps Emerge Winners

The May month witnessed some dramatic shifts in the Indian stock market as the month started amid heated cross-border issues between India and Pakistan over the Pahalgam terror attack followed by precision strikes by the Indian Air Force over terrorist bases in Pakistan and Pakistan-occupied Kashmir (PoK). However, the Indian stock market repeated history and stood strong during the times of war.

The month also perpetuated the tariffs debate initiated by US President Donald Trump, where he imposed 50% tariffs on goods imported from the European Union.

Increasing Bond Yield

The increasing bond yield remained another pain point for the market. Weak U.S. bond auctions and rising treasury yields sparked a global risk-off sentiment, triggering sharp sell-offs in Indian equities.

Surging yields in both the U.S. and Japan raised investor concerns about a potential flee of Foreign Institutional Investors (FIIs) from emerging markets to safer assets.

U.S. Debt Burden

On the macroeconomic front, US deficit concerns heightened as the auction of $16 billion in 20-year bonds witnessed a tepid response, developing term-premium risk among investors. This led to a decline in US equities and the dollar index, while treasury yields surged.

Moreover, the US House of Representatives approved a sweeping tax and spending bill, feared to increase the US deficit by $3–5 trillion. This further worsened the fiscal outlook of the US, with Moody's having already downgraded its credit rating.

Market Performance Overview

Indices Dance

Benchmark indices Nifty and Sensex recorded gains for the third consecutive month. Nifty increased 1.7% in May to 24,750, while Sensex closed at 81,451 with a 1.5% gain, supported by institutional inflows and strong earnings despite geopolitical and trade worries.

Both indices rose approximately 12% since March but remain 6% below their peak levels from September 2024.

Mid and Small caps outperformed. The Nifty Midcap 100 index rose 6.16%, while the Nifty Smallcap 100 jumped 8.7% in May.

Nifty Defence Index Skyrockets

The Nifty Defence Index delivered a remarkable 22% return in May as indigenous defence systems showed strong capabilities during the cross-border tensions. It hit a fresh 52-week high on May 16 after rallying for six straight sessions.

Momentum followed PM Modi’s call for stronger home-grown defence capabilities under the Make in India programme.

Key performers: Bharat Electronics Limited (BEL) rose 22%, while Garden Reach Shipbuilding surged 56% after its Q4 results showed a 67% revenue rise and 119% profit jump.

FPI Inflows

May saw strong net buying from both foreign and domestic institutional investors. FPIs bought stocks worth Rs 19,686 crore—the highest since September 2024. This helped lift the Nifty and Sensex to a 7-month high during the third week of May.

FPIs were net sellers in the previous months: Rs 80,000 crore in Jan, Rs 34,754 crore in Feb, and Rs 4,000 crore in Mar. Domestic investors also bought Rs 47,441 crore worth of equities in May.

Big Trades in May

Foreign investors executed block deals worth $5.5 billion in May—a major jump from $220 million in April. Major deals included:

• British American Tobacco sold a $1.51 billion stake in ITC.
• Indigo co-founder Rakesh Gangwal sold a 5.7% stake worth $1.36 billion.
• Singtel sold $1.5 billion worth of shares in Bharti Airtel.

MINTIT Outlook for June

RBI Policy Actions

The RBI continued efforts to revive growth by cutting interest rates and boosting liquidity. The repo rate was lowered by 50 basis points to 5.5%—the third cut in a row, totaling 100 basis points. This move makes loans cheaper.

It also cut the Cash Reserve Ratio (CRR) by 100 basis points (in phases from September), injecting Rs 2.5 trillion into banks.

RBI changed its stance from “accommodative” to “neutral,” signaling confidence in growth. It injected Rs 9.5 trillion since December 2024, moving the system from a liquidity deficit to a Rs 1.25 trillion surplus by March 2025.

The central bank paid a record Rs 2.69 trillion dividend to the government in FY25, up 25% year-on-year.

Expected Market Impact

More liquidity and lower interest rates are expected to boost spending, credit growth, and sectors like Financials, Real Estate, and Consumer Discretionary.

Global Market Outlook

Global growth remains slow. Tariff concerns are easing, and the US Fed may cut rates twice in 2025.

Risks Ahead

Short-term risks for Indian markets include weak capital flows, slower domestic growth, and a potential rebound in China. These may limit sustained rallies.

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