A significant downturn in the Indian stock market has left investors rattled, with major indices experiencing a sharp correction after reaching record highs. The sell-off, driven by both domestic and international factors, has impacted companies across various market capitalizations.
The Indian stock market has witnessed a dramatic reversal of fortune in the last four months, sending shockwaves through the investor community. After scaling an all-time high of 85,978.84 on September 27, 2024, the Sensex has plummeted by nearly 12%, a staggering 10,000-point drop. The NSE Nifty Index has followed a similar trajectory, declining by 12.38% during the same period.
Large-cap stocks have borne the brunt of the sell-off, primarily triggered by heavy selling from Foreign Portfolio Investors (FPIs). The NSE large-cap index has fallen by 13.27% in the last four months. However, the impact hasn't been limited to large companies alone; mid-cap and small-cap indices have also experienced significant corrections, dropping by 12.85% and 9.87%, respectively.
Several factors have contributed to this market downturn. India's GDP growth has slowed, and high-frequency economic indicators have moderated throughout 2024. Persistent food inflation, rising US bond yields strengthening the dollar, and increasing commodity prices have further dampened market sentiment, diminishing hopes for a rate cut by the Reserve Bank of India.
The aftermath of the US presidential election has also played a role. Investors are increasingly favoring dollar assets, leading FPIs to sell off emerging market equities, including those in India. The numbers speak for themselves: FPIs sold Rs 94,017 crore of equities in October and Rs 21,612 crore in November. After a brief buying spree in December, they resumed selling in January 2025, offloading Rs 51,748 crore till January 21.
Mutual fund investors have also felt the pinch, with net asset values of schemes plunging across the board. Jacob Cyriac, a software engineer based in the US, noted a 21% drop in the XIRR of his mid- and small-cap investments in recent months.
Despite the market correction, experts advise investors to remain invested through Systematic Investment Plans (SIPs), emphasizing the market's history of recovery. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, pointed out that high valuations and weaker-than-expected Q2 GDP numbers triggered the initial decline.
Looking ahead, analysts anticipate continued volatility. While large-cap corrections may be nearing completion, mid- and small-cap stocks could experience further declines. Kunal Vora, Head of India Equity Research at BNP Paribas, expects single-digit returns for the markets in 2025, citing slowing GDP growth and moderated high-frequency indicators.
Furthermore, the policies of the new US administration are expected to influence global markets. Although strong domestic inflows continue to support the Indian equity market, continued selling by FIIs, who hold substantial Indian equities, remains a risk.
