So Far, So Good: Is Indian Stock Market Setting Up for a Buy on Dip?

Stock Markets: March has been kind to D-street investors so far. Benchmark indices— Sensex and Nifty— have surged by more than 2.6% this month, albeit far from their peak levels. While broader markets are still down by around 17% with a pure bloodbath in small-cap and mid-cap indices, the slowing pace of foreign capital outflow coupled with improving macros is signalling a reversal in the existing bearish trend.

Broader indices are currently trading at a forward PE ratio of around 18.5, which is slightly below the 5-year historical average. Given the projected 10-12% earnings growth for FY26, current valuations might seem just reasonable, as per analysts.

On the macro front, GDP at 6.2%, private consumption improving to 6.9%, easing inflation, RBI’s liquidity infusion and finally the start of the rate cut cycle points to a moderate, if not impressive, growth outlook. But not without its own risks playing in the background, thanks to Trump's tariff play. While trade tensions could impact the region, analysts believe that India faces a lower overall risk due to its relatively low goods exports-to-GDP ratio.

"We believe India could be less exposed given lower goods trade orientation than other Asian economies, and the fact that monetary policy easing across policy rate, liquidity and regulations should provide some floor for private capex," Morgon Stanley stated in a recent report. For investors, this raises only a single question- Has the time finally arrived to adopt a 'buy on dips' approach? Here's what analysts have to say

What Markets are signalling?

So far this year, three key trends have weighed heavily on investor sentiment: continuous pace of FII outflow, a weak Q3 earnings season for India Inc. and uncertainty over global trade policies, adding additional pressure on the Rupee. However, all these trends are now undergoing a shift. By figures, the Nifty index has fared better than the MSCI World index over the past month. India's volatility index, VIX, has plummeted over 14% during the same period.  

While analysts believe that volatility might continue to haunt D-street, atleast in the near-term, as global economies adjust to the new policy view, domestic markets are now close to bottoming out. "We see an improved risk-reward for domestic equities over a 12-month horizon, supported by reasonable valuations, the likelihood of growth and earnings cycle improving and easing financial conditions. We are Overweight on equities and would use the volatility to buy on dips," Standard Chartered stated in a note on March 12.

The Nifty index is currently trading below its 50, 100, and 200 DMAs, with over 80% of its stocks below the 200 DMA. As per historical patterns, market sell-offs have bottomed out when around 84% of stocks slipped below this level. The large-cap segment continues to be analysts' top bet, followed by certain mid-caps, which are seeing strong earnings visibility.

However, there is one thing that is keeping analysts doubtful, which is urban consumption. Liquidity injection and a revival in government capex are fine, but urban consumption needs to pick up to bring the overall cyclical slowdown to an end.

"With valuations just below the five-year average and earnings growth expected at 10-12% for FY26, it makes sense to start deploying capital—especially in large caps and select mid-caps with strong earnings visibility. While urban consumption slowdown remains a concern, signs of stability in demand and government capex should support a recovery," said Hitesh Jain, strategist & institutional equities research, Yes Securities.

Has the time arrived for 'Buy on Dip'?

Technically, the RSI 14 (relative strength index) is down to 22. The last time RSI fell to this level was during the Covid period. Analysts point out that the index is now in a deeply oversold zone. While this does increase the probability of a strong rebound, risk remains. LKP Securities said that Nifty has reached the 100 EMA on the weekly chart, a level that has historically triggered sharp recoveries.

"In the last four years, the index has tested this support (100 weeks EMA) twice, leading to rallies of 24% and 55%. A similar bounce-back could be on the horizon. In the medium term, a gradual recovery is expected, though the uptrend may be slow with phases of consolidation," the brokerage house said.

A decisive breakout above 22,680 could open the doors for further upside, potentially pushing the index toward 23,000 and 23,400, where immediate resistance levels are placed, said Mandar Bhojane, equity research analyst at Choice Broking.

“On the downside, 22,300 serves as strong immediate support, followed by a critical level at 22,000. Given the current technical setup, buying on dips could be a favorable strategy as long as Nifty holds above the 22,300–22,000 support zone. Traders should look for confirmation signals before taking fresh long positions,” he added.

Despite improving sentiment and outlook, India's consumption story is yet to show strong signs of revival. Government capex alone might not be enough to break the economy’s cyclical slowdown. Much will depend on Q4 earnings, as D-Street watches for cues on a potential surge in private capex. If the shift remains elusive, markets could see more pain ahead.

(The opinions and recommendations expressed in the article are those of individual analysts and brokerage firms. Investors should consult certified market experts before making decisions.)