The Indian markets have been painted red lately. Since hitting 85,978, the Sensex has slipped to 72,640, marking over a 15.50% decline from its September 2024 peak. Similarly, the Nifty 50 has already corrected over 16.50% from its September 2024 peak of 26,277, while the Nifty IT index is down 20% from its December 2024 high.

Midcap and Smallcap stocks have taken an even bigger hit. February was their worst month since March 2020, with the indices dropping 11% and 13%, respectively. In fact, the Nifty Smallcap index plunged 25% from its December peak.

Whether it’s indices, individual stocks or investor portfolios, red is the common colour on everyone’s charts. Anyone with a demat account is panicking, and the most common question right now is: Is the correction over? What’s driving this sell off and can Nifty recover from the current 22,000 levels?

In this blog, we’ll break down the reasons behind the market slump and what lies ahead.

Why Is the Stock Market Falling?

There are several factors behind this decline. Let’s cover the top ones.

1. Impact of Trump’s Tariffs on Global Trade

Trump’s trade policies have shaken global markets, raising concerns about economic growth. The US has imposed a 25% tariff on imports from Canada and Mexico, while tariffs on Chinese goods have now reached 20% after an additional 10% duty. These measures could slow down global trade and impact businesses worldwide.

2. Rupee’s Volatility Triggers Higher FII Outflows

The rupee’s steady slide has really affected the market mood. On Monday, it hit an intraday record low of 88 per US dollar. The decline in the market is mainly due to the rupee losing value. When the rupee weakens, foreign investors tend to sell more because their actual returns take a hit.

3. FII continues selling

Foreign Institutional Investors, or FIIs, have been on the selling side in the Indian stock market. In February alone, they have pulled out over ₹58,988 crore. If we add January’s numbers, the total FII outflow crosses ₹1,46,362.74 crore in just two months.

So, what’s causing this massive sell off? One of the biggest concerns for FIIs is the valuation of Indian markets, which they find relatively expensive. On top of that, the strengthening US dollar is making dollar-denominated assets more attractive.

This continuous foreign money outflow is a major reason behind the recent market decline. With rising global uncertainties, investors are shifting towards safer assets like US bonds and gold, reducing their exposure to riskier emerging markets like India.

For now, all eyes are on how global trends unfold and whether FIIs find enough reasons to return to Indian equities.

4. Valuation worries

Valuations, especially in small and midcap stocks, continue to be a concern for investors. According to a recent report by Nomura, the valuation of MSCI India has come down from its peak of 24x in October but still remains above the 2015-2022 average of 19x.

As Nomura highlights key near-term risks, including “further multiple compression and some earnings downgrade risk.” With valuations still on the higher side, investors remain cautious about the road ahead.

5. Concerns Over Weak Bank Earnings

Banking stocks make up about 30% of the Nifty 50 index, so any weakness in this sector has a big impact on the overall market. After disappointing Q3 results, investors are now worried that Q4 earnings might also fall short of expectations, adding to the negative sentiment.

6. Rising US Bond Yields

Higher returns in the US bond market are drawing FIIs away from Indian equities. This trend has picked up momentum after Donald Trump’s return as US President, leading to increased capital outflows from India.

7. FIIs Moving Investments to China

China's recent economic stimulus measures, rate cuts, and liquidity injections have grown investor confidence in its market. As a result, many FIIs are shifting their investments from India to China, following a ‘sell India, buy China’ strategy. This has further increased selling pressure on Indian stocks.

Expert View Of Dalal Street

The Indian share market today has been under pressure, with Nifty 50 and BSE Sensex down 16% from their September highs. Weak investor sentiment stems from slowing earnings, foreign outflows, and global uncertainty. Small and mid-cap segments also entered a bear market in February, dropping over 20% from their peaks.

Market experts advise investors to stay patient. Analyst observed that a quick recovery in the Indian market seems unlikely for now, despite reasonable valuations. Industry experts pointed investors should hold on major investment and follow global developments before making any decisions. Saying for now caution seems to be the most suitable approach as markets navigate these uncertain times.

Conclusion

Indian stocks have been on a bit of a roller coaster lately. Weak earnings expectations, global market shifts and changing investment flows are all adding up to a noticeable sell off. Until these issues settle down, it's likely we may see more ups and downs in the market.