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The Indian stock market experienced a significant downturn over five days, with the Sensex plummeting over 4,000 points and the Nifty shedding nearly 5 percent. This sharp decline, the most dramatic in two and a half years, was triggered by a confluence of factors, primarily stemming from the US Federal Reserve's actions and the resulting investor sentiment. The Federal Reserve's announcement of a 25 basis points rate cut, while anticipated, was accompanied by a signal of only two further rate cuts in the coming year. This more cautious outlook than expected, coupled with Fed Chair Jerome Powell's emphasis on persistent inflation risks and upward revision of the 2025 inflation forecast, sent shockwaves through global markets, including India. This hawkish stance signaled a continued commitment to combating inflation, even at the cost of potential economic slowdown, leading to widespread uncertainty and risk aversion among investors.
Adding to the market's woes was the aggressive selling spree undertaken by Foreign Institutional Investors (FIIs). After a period of buying earlier in December, FIIs reversed course, net selling ₹12,230 crore worth of Indian equities over four sessions, turning them into net sellers for the month to date. Analysts attribute this shift to several factors, including the strengthening US dollar, a robust US economy diverting capital away from emerging markets like India, and the relatively high 10-year US yield of approximately 4.52 percent. The sluggish earnings growth within India further diminished the attractiveness of Indian equities compared to other investment opportunities. Experts suggest that FIIs might return once the dollar stabilizes, but the near-term outlook remains uncertain, contributing to the ongoing market instability.
The already fragile investor sentiment was further exacerbated by high valuations and sluggish corporate earnings growth. The Nifty’s one-year forward price-to-earnings (P/E) ratio neared 20x, exceeding its 10-year historical average of 18.97x. This elevated valuation, coupled with the relatively slow growth in corporate earnings, left investors with minimal margin of safety. The perceived high-risk profile at these valuations, made even more pronounced by the global uncertainty surrounding the Federal Reserve's actions, triggered a sell-off as investors sought to reduce their exposure to potentially overvalued assets. Furthermore, the anticipation of only marginal improvement in Q3 FY25 earnings, which experts suggest will likely be absorbed by leading indicators, further limited any potential near-term upside and added pressure to the market.
Technical factors also played a significant role in accelerating the market decline. The Nifty's breach of its 200-day moving average (DMA) of 23,870 on Thursday and subsequent breach of key support levels of 23,850 intensified selling pressure. This technical breakdown signaled to many investors that further downside was likely, creating a self-fulfilling prophecy as more investors rushed to sell their holdings, exacerbating the fall. This breakdown opened the door for potential further decline towards the 23,700-23,500 range, underscoring the vulnerability of the market in the face of adverse external and internal factors.
The immediate outlook for the market remains uncertain, although experts anticipate a potential mild recovery before the Reserve Bank of India’s February monetary policy meeting. While some believe that the recent fall has made valuations fairer for certain large-cap stocks, particularly in the banking sector (with suggestions that ICICI Bank and HDFC Bank might offer attractive buying opportunities), caution prevails. The FMCG sector, typically considered defensive, remains in a high valuation territory, despite a continuing consumption slowdown. Investors are advised to adopt a wait-and-see approach, prioritizing quality stocks with reasonable valuations and exercising caution in the current volatile climate. The overall situation highlights the interconnectedness of global financial markets and the impact of macroeconomic factors on investor sentiment and market performance.