The Indian stock market has experienced a significant downturn, with the Sensex plunging from its peak of 85,978.84 on September 27, 2024. Over the last four months, the index has nosedived by nearly 10,000 points, reflecting a 11.79% decline. This dramatic fall, which has predominantly affected large-cap stocks, has left investors grappling with heavy losses and shaken confidence. Similarly, the NSE Nifty Index has dropped by 12.38% during this period, signaling widespread market distress.
Performance of Market Segments
Large-cap stocks bore the brunt of the sell-off as foreign investors offloaded significant holdings, resulting in a 13.27% fall in the NSE large-cap index. The carnage extended across other market segments as well: the NSE Mid-cap index dropped by 12.85%, while the small-cap index declined by 9.87%. Interestingly, IT stocks managed to hold their ground, but capital-intensive sectors like automobiles and oil & gas witnessed steep declines.
Underlying Causes of the Downturn
The market correction is rooted in several factors. India’s economic growth decelerated significantly in 2024, with high-frequency economic indicators showing a steady decline. Although these indicators are stabilizing, other challenges persist.
Food inflation remains stubbornly high, eroding consumer spending power. Concurrently, rising US bond yields have strengthened the dollar, putting pressure on emerging market currencies, including the rupee. An uptick in global commodity prices has further dampened hopes of an interest rate cut by the Reserve Bank of India (RBI).
Impact of Global Dynamics
The global financial landscape has compounded the challenges for Indian markets. The aftermath of the US presidential election, which resulted in Donald Trump’s victory, sparked a surge in the US dollar and a 100 basis points (bps) increase in the 10-year US bond yield, reaching 4.7%. This development has diverted foreign investments away from emerging markets like India, especially given their previously high valuations.
Foreign Portfolio Investors (FPIs) have aggressively sold Indian equities, with October 2024 witnessing a massive Rs 94,017 crore outflow. The trend continued in November, with FPIs selling Rs 21,612 crore. Although there was a brief respite in December when FPIs purchased Rs 15,446 crore worth of equities, selling resumed in January 2025, with Rs 51,748 crore offloaded by January 21, according to NSDL data.
Investor Sentiment and Mutual Funds
The sell-off has deeply impacted mutual fund investors, with net asset values (NAVs) of various schemes taking a substantial hit. “The XIRR (Extended Internal Rate of Return) of my investments in mid- and small-cap schemes has dropped by 21% over the past couple of months. While experts recommend continuing SIPs (Systematic Investment Plans), the losses are concerning,” shared Jacob Cyriac, a software engineer based in the US.
Despite this challenging period, equity funds reported a 14.5% rise in inflows, amounting to Rs 41,156 crore in December. This indicates that long-term investors continue to see value in the market.
Economic Indicators and Market Valuations
In September 2024, the Indian economy appeared to be in a “sweet spot” with strong GDP growth and robust corporate earnings. However, the release of weaker-than-expected Q2 GDP numbers marked the beginning of the downturn. The country’s GDP growth dropped to a seven-quarter low of 5.4% in Q2 FY2025. Key indicators such as banking credit growth, personal loans, GST collections, and rail and port traffic also showed signs of slowing down, further denting market confidence.
Looking Ahead: Opportunities Amid Challenges
The current market correction, while painful, could pave the way for future opportunities. Historically, market downturns have been followed by recoveries, offering attractive entry points for long-term investors. Experts continue to advise maintaining disciplined investment strategies, particularly through SIPs, to capitalize on eventual market rebounds.
As the market grapples with these challenges, patience and a long-term perspective will be key for investors navigating this turbulent phase.
