Decoding What Could Be Fueling the Nifty 500 Rally?

Markets, represented by the Nifty 500, are up about 8% since the start of April.

In this post, we explore the key macro and policy developments that could be fueling this rally. From a sharp recovery in FPI inflows and steady improvement in economic indicators to the RBI’s rate cuts and a shift toward a pro-growth policy stance, several tailwinds appear to be aligning. Let’s look at what might be driving the market’s renewed optimism.

1. Rupee Recovery Aligns with Rebound in FPI Inflows

We observed a recovery in FPI inflows last month, and the momentum has strengthened further. Although the year-to-date net outflow stands at ₹92,491 crore, inflows improved to ₹4,223 crore in April and surged to ₹19,860 crore in May.

Analysts point out that FII flows are often more sensitive to movements in the USD/INR exchange rate than to domestic fundamentals. From September 2024 to mid-February 2025, the rupee depreciated from 83.86 to 87.49 per USD, which likely discouraged foreign investors due to potential currency losses. However, as the rupee began to appreciate after mid-February, FII inflows picked up again. A stronger rupee boosts the dollar-adjusted returns for foreign investors when they repatriate funds, thereby making Indian assets more appealing and triggering higher capital inflows.

2. Steady Growth Momentum Reflected Across Key Economic Indicators

Key economic indicators reflect sustained momentum in India’s economy. WPI inflation eased from 2.5% in Feb’25 to 0.9% in Apr’25, while CPI declined from 3.6% to 3.2% over the same period. The India Composite PMI rose steadily since Dec’24, reaching 61.2 in May’25, indicating strong expansion in private sector activity.

In April 2025, bank credit continued to grow in double digits. Domestic air traffic rose 8.8% YoY to 1.44 crore passengers. Credit card transactions increased 30.7% YoY to 45.1 crore, with a transaction value of ₹1.8 trillion (up 17.6% YoY). Port cargo volumes also grew 5.8% YoY to 109.5 million tonnes.

3. RBI Projects Resilient Growth in FY26

The RBI expects India’s economic growth to remain strong in FY26, supported by rising private consumption, healthy bank and corporate balance sheets, improved financial conditions, and continued government capex. It has projected real GDP growth at 6.5%, with risks evenly balanced.

The manufacturing sector is likely to benefit from policy initiatives like the PLI scheme and the National Manufacturing Mission under the Make in India push. Exports are expected to stay resilient, aided by India’s participation in 14 FTAs and six PTAs, along with ongoing trade negotiations with the US, EU, Oman, and Peru.

The RBI also anticipates a manageable current account deficit, supported by steady services exports and remittances. Inflation is expected to ease further, driven by lower global commodity prices, easing supply chains, and the likelihood of an above-normal monsoon boosting agricultural output.

4. RBI Signals Scope for Further Rate Cuts Amid Easing Inflation and Growth Focus

The RBI cut the repo rate by 50 basis points this year after maintaining it at 6.5% since February 2023, and shifted to an accommodative stance in its April policy meeting. In its annual report, the central bank reiterated its pro-growth focus, citing a sharp decline in food inflation and a broader easing in price pressures as key enablers.

Inflation is projected to align with the 4% target over the next 12 months, supported by softening global commodity prices, easing supply chain constraints, and the expectation of an above-normal monsoon, which is likely to boost agricultural output. Given this benign inflation outlook and moderate growth, the RBI signaled room for a more supportive monetary policy, hinting at the possibility of further rate cuts.

Lower interest rates are generally positive for equity markets, as they reduce borrowing costs, enhance corporate profitability, and improve overall liquidity, thereby supporting investor sentiment and equity valuations.

Conclusion

While short-term market moves can sometimes diverge from fundamentals, the recent rally seems rooted in improving macro stability, supportive policy measures, and renewed investor confidence. Easing inflation, stronger capital flows, and resilient growth indicators have created a constructive backdrop. However, risks such as global volatility from geopolitical tensions and trade disputes, future corporate earnings, and the monsoon’s performance remain key watchpoints. Investors would do well to stay balanced, acknowledging the positives while staying mindful of potential headwinds ahead.

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