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An Oversold Indian Market May Not Suggest Upside Just Yet

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India’s Nifty 50 Index’s September slide continued in October, pulling the benchmark index in oversold territory. That may not signal a rebound yet.

The gauge representing India’s 50 largest companies has so far declined 5 percent in October, after a 6 percent fall in September as a weaker rupee, higher crude prices and liquidity concerns stemming from the crisis at Infrastructure Leasing & Financial Services Ltd. roiled the stock market.

That brought down the index to less than 25 on the relative strength index—a momentum indicator. A level below 30 indicates that a security may be oversold, signalling a rebound. A level above 70 reflects that it may be overbought and could fall.

Not only is India oversold compared to developed Asian peers like Japan, Hong Kong and Singapore, but also ranks the lowest among emerging peers like China, South Korea and Taiwan.

In the last five years Nifty 50 fell below 25 on relative strength index twice, and rebounded more than 4 percent each occasion. Still, according to Chandan Taparia, associate vice president at Motilal Oswal Securities Ltd., a rally from here is not certain.

The Nifty is in a crucial zone and holding on to the current levels may see lead to an upside towards 10,650, he said. The medium-term trend, however, remains negative until it breaches 10,850. Taparia cautioned of a fresh decline towards 9,800 if the current move is not sustained.

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