The Indian stock market experienced a significant decline on Friday, October 25, 2024. as both Sensex and Nifty 50 faced a sharp downturn. The selloff left investors facing substantial losses, with an estimated ₹9 lakh crore erased from market valuations in a single day. In this article, we delve into the primary factors driving the fall and examine the market indicators that led to the steep drop.
Sensex and Nifty Plunge: A Snapshot of the Market Fall
The BSE Sensex fell by 864 points, or 1.1%, reaching 79,201, while the Nifty 50 index dropped by 1.3%, landing at 24,094. Midcap and Smallcap indices were also hit hard, declining 2.6% and 3.2%, respectively. The overall market capitalization of BSE-listed companies decreased from nearly ₹444 lakh crore to around ₹435 lakh crore. This significant reduction highlights a widespread market nervousness, mirrored by a 7% increase in the India VIX volatility index.
Nifty 50 has now been on a five-session losing streak, plunging over 8% from its record high of 26,277.35 set on September 27. Here’s a closer look at the critical factors contributing to the current downward trend in Indian equities.
1. Massive Foreign Capital Outflow
The primary driver of the recent market decline is the extensive selloff by foreign portfolio investors (FPIs). In October alone, FPIs have sold over ₹98,000 crore worth of Indian equities, shifting funds to other markets with more attractive valuations, such as China. Beijing’s recent steps to support its capital markets have made Chinese stocks more appealing, prompting FPIs to redirect capital.
“The FPI selloff is unprecedented. Not even during the COVID-19 crash or the global financial crisis did we see this level of sustained foreign investor exit,” noted V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. The FPI exodus, which has already reached ₹98,085 crore this month, has rendered the popular “buy-on-dips” strategy ineffective.
2. Weak Q2 Earnings Dampens Sentiment
The lackluster performance in the September quarter has intensified market concerns about inflated valuations. According to Kotak Institutional Equities, Q2FY25 earnings have fallen below expectations across multiple sectors. Key firms such as Hindustan Unilever and Nestle reported sluggish urban and rural consumption, further impacting investor confidence.
Vijayakumar stated that FY25 earnings growth projections may fall to around 10% or even lower, noting, “The subdued Q2 numbers and declining rural and urban consumption indicate a likely underperformance in earnings growth.”
3. Uncertainty Surrounding US Elections
Global political factors are adding to investor anxiety. The upcoming U.S. election, with a tight race between Kamala Harris and Donald Trump, could significantly impact U.S. trade policies. If elected, Harris is expected to continue Biden’s policies, while Trump could adopt a more transactional stance that may affect global trade and economic growth.
“If Trump wins, we could see more tariffs and policies that may disrupt global trade,” Vijayakumar observed. Such uncertainties create volatility, causing international investors to adopt a cautious stance.
4. Geopolitical Tensions in the Middle East
Geopolitical events are also fueling the stock market’s volatility. Heightened tensions in the Middle East, particularly with recent escalations between Israel and Hamas, have impacted investor confidence. According to Reuters, Israeli forces have conducted significant operations, leading to increased global unease, particularly around energy supply stability.
Furthermore, reports indicate that U.S. and Israeli officials are preparing for discussions aimed at stabilizing the Gaza region, but these developments have yet to ease market concerns. Given the potential impact of these tensions on energy prices and market stability, global markets remain on edge.
5. Market Valuations Remain Stretched
Despite recent corrections, Indian equity valuations are still high. Data from Trendlyne shows that Nifty 50’s price-to-earnings (PE) ratio of 22.8 is above both its one-year and two-year averages of 22.6 and 22.2, respectively. This elevated valuation has deterred investors from re-entering the market.
Vijayakumar commented, “Current valuations remain uncomfortable, making it challenging to justify buying at these levels.” The ongoing valuation premium, coupled with other factors, makes the market susceptible to profit-taking and further selloffs.
Conclusion: What’s Next for Investors?
The recent selloff in the Indian stock market reflects a complex interplay of domestic and international pressures. High valuations, foreign investor pullback, weak earnings, political uncertainties, and geopolitical risks collectively contribute to this market dip. As the global economic landscape remains volatile, investors may need to exercise caution and wait for more favorable conditions before reentering the market.
For those navigating this turbulent period, diversification and a long-term perspective are recommended. Keep an eye on global developments and domestic earnings reports to make well-informed decisions.