Indian Markets Bloodbath: What’s Driving the Panic?
Discover the reasons behind the market crash and future opportunities.
The Indian stock market reached an all-time high in September 2024, with the BSE SENSEX Stock Market Index touching 85,836 and the NIFTY Index reaching 26,212. Since then, it has been falling, and there has been a bloodbath in the last few weeks. During the past few days, investors lost nearly 25 lac crores of rupees during the market slump.
The fall in Indian markets was due to several interrelated factors impacting the sentiment of investors who went on a selling spree.
Here’s why the Indian markets have been crashing…
High Market Valuations
The Indian market rose exponentially after COVID-19 and reached an all-time high valuation. This high valuation led many investors to book a profit, ultimately correcting the stock prices.
HMPV Scare
After discovering the Human Metapneumovirus virus (HMPV) case in India on January 6, the market reacted strongly due to fears of COVID-like situations, which could disrupt economic activity and business operations. The market went on a selling spree, resulting in investors losing over ₹12 lakh crore in a single session.
Uncertainty Over Donald Trump's Trade and Economic Policies
There is uncertainty about how the new administration will alter the regulations after Trump is sworn in on January 20, 2025. With Donald Trump promising wide-ranging tariffs, mass deportations of undocumented workers, and adjustments to the Inflation Reduction Act and CHIPS Act, these changes would lead to substantial shifts in economic and trade policies, creating apprehension among investors about the potential impact on markets. Speculation also exists that he may propose higher tariffs on countries, including India, further worsening investor sentiment.
Diminishing Hopes: US Fed Rate Cut
As the US economy grows rapidly and inflation remains elevated, the Federal Reserve will hold higher interest rates for longer. It is now predicted that rate cuts may not occur in 2025, diminishing investor expectations and adding pressure to global markets.
US Sanctions on Russia's Oil Exports and Rise in Crude Oil Prices
The outgoing US administration has imposed new sanctions on Russian oil exports to countries like India and China. Starting in March, these sanctions are expected to affect 40-45% of India's oil imports, which has led to increased uncertainty in energy markets and added inflationary pressures. Consequently, Brent crude oil prices have soared. Morgan Stanley, a global financial services company, warns that these sanctions could significantly affect India's oil imports and increase global crude prices, intensifying economic challenges and contributing to heightened market volatility.
Caution Before the 2025 Indian Budget
Generally, investors exit the market before the budget due to uncertainties around fiscal policies and potential reforms and re-enter the market after the budget announcement.
Persistent FII Outflows
Foreign institutional investors (FIIs) sold nearly $23 billion worth of Indian stocks from October 2024 to January 2025. The sell-off was fueled by the rupee falling to an all-time low of 86 against the dollar, which made Indian investments less attractive due to concerns over further depreciation. Additionally, slow GDP growth, high US bond yields, tariff fears, and increased competition from the US market further contributed to the substantial outflows.
Weak Q3 Earnings
Indian corporates reported weak Q3 earnings, further reducing the investor's confidence and leading to a sell-off.
Slow Growth of the Indian Economy
The first advance estimates for FY25 released by the National Statistics Office (NSO) showed that the real gross domestic product (GDP) is growing at a four-year low of 6.4%, further contributing to the negative sentiment.
All these global and domestic factors put pressure on the Indian stock market, which started crumbling and eroded investors' wealth.
How Does The Future Look Like?
The rise and fall of the market are natural. While downturns may cause concern, smart investors recognize these moments as opportunities. It is the ideal time to invest in mutual funds through SIPs, as they offer the benefit of rupee cost averaging. Rupee Cost Averaging (RCA) helps you buy more units at lower prices during market downturns, which can benefit you in the long run.
Although the market may seem unpredictable, and you might feel tempted to stay away, remember in the long term, markets give good returns. India's future appears promising, fueled by its demographic advantage, rapid economic growth, innovation, and thriving digital economy.
India is expected to become the third-largest economy in the world by 2030. You can build substantial wealth over time by staying committed to your investment plans and using downturns to your advantage.