Can October turn the tide for Indian stocks after September rout?

Mumbai: Investors heading into October will have to weigh a historically favourable month for equities against a challenging backdrop of elevated crude oil prices, rising global bond yields, continued foreign selling and a weak rupee. October has typically been a good month for Indian stocks, with the Nifty 50 ending higher in seven of the past 10 years.

This year, however, seasonality may offer only limited comfort after a sharp September selloff.

"October will be an important test of whether the correction in September has adequately priced in risks, or whether further adjustment is required," said Tejas Shah, director and head of trading at Equirus Securities.

The Sensex and Nifty fell 6% each in September, while the BSE MidCap 150 and BSE SmallCap 250 indices dropped 6.6% and 3.2%, respectively. These declines are their worst monthly fall since March, when both the indices tumbled 11%.

October has historically been a stronger month for equities, partly as investors factor in expectations of higher festive-season spending on automobiles, jewellery and consumer durables.

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"The basic underlying common thread is the start of the festive season," said Sunny Agrawal, head - fundamental retail research, SBI Securities. "For most sectors, the second half of the fiscal year is better in terms of the demand environment and volume growth. That may be one of the reasons why October has historically been a stronger month."

The September-quarter earnings season starting in October will be closely watched for signs of an improvement in corporate profitability, particularly among large-cap stocks that have underperformed in the recent correction. Over the past decade, the Sensex and Nifty have delivered average October gains of around 1%, while the BSE MidCap 150 and BSE SmallCap 250 have averaged gains of around 1% and 1.4%, respectively.

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Notwithstanding the seasonal cheer, analysts said the Nifty faces strong hurdles around the 23,000 zone, a key support that was broken in the recent sell-off. The index closed at 22,620.45 on Wednesday. The silver lining is that the market may be at oversold levels.

"The earlier support of 23,000-23,100 should now act as a key resistance," said Agrawal. "The moment the market can take out that level, I think the market should start looking positive. The next hurdle would be around 23,600."

A rebound in banks will be crucial for the markets to notch up gains in October this time.

"Banking and financial services will also remain crucial, as private banks, financial services and Bank Nifty have historically shown relatively strong October seasonality and carry a significant weight in the Nifty," Shah said. "Any renewed buying in this space could provide a meaningful boost to the broader market," he added.