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The Indian equity market experienced a significant downturn, with the Sensex plummeting over 1000 points and the Nifty falling by 1.5 percent. This sharp decline marks the fourth consecutive session of losses, pushing the Nifty to its lowest level in seven months. The broader market indices suffered even more severely, with mid- and small-cap stocks experiencing losses exceeding 4 percent each, resulting in a combined market capitalization erosion of over Rs 12.39 lakh crore. This substantial drop reflects a confluence of global and domestic factors that are currently impacting investor sentiment and market stability.
The primary catalyst for this market selloff can be attributed to stronger-than-expected US jobs data released the previous Friday. This unexpectedly robust employment report dashed hopes for early interest rate cuts by the Federal Reserve, leading to a surge in US bond yields and the dollar index. This strengthened dollar put considerable pressure on emerging markets, including India, exacerbating existing concerns. Adding to the inflationary pressures, crude oil prices surged to 15-week highs, fueled by renewed US sanctions on Russian oil exports. The combination of these external factors significantly contributed to the negative sentiment within the Indian markets.
Domestic factors further compounded the negative market trends. The Indian rupee weakened to a record low against the dollar, reaching Rs 86.59, while the 10-year bond yield increased by 7 basis points to 6.85 percent. Persistent foreign portfolio investor (FPI) selling intensified the negative sentiment, with FIIs net selling another Rs 4,900 crore in Indian equities, adding to the Rs 20,000 crore already sold in January. These domestic headwinds, coupled with the global pressures, created a perfect storm that led to the significant market decline.
Looking ahead, market participants anticipate that global factors will continue to play a dominant role in shaping market trends in the near term. The upcoming US Producer Price Index (PPI) data release is expected to influence Federal Reserve policy expectations. Analysts suggest that the global markets are adjusting to the possibility of fewer or no rate cuts in 2025, given the persistent strength of the US economy. This adjustment process is likely to continue influencing market volatility in the short term. Domestically, the upcoming Union Budget and the Q3 corporate earnings season will be critical factors in determining the short-term market trajectory. Recent GDP downgrades and slowing earnings, against a backdrop of higher valuations, are weighing heavily on investor sentiment. The Budget, RBI policy decisions, and Q3 results will collectively shape the near-term market trends.
From a technical perspective, the Nifty's close below key support levels indicates a heightened risk of further downside. Analysts predict that the index might test the 22,900–22,800 range in the near term, with immediate resistance anticipated at 23,260. The prevailing weak trend suggests that a ‘sell-on-rise’ strategy might be prudent. Similarly, Bank Nifty is also under pressure, having closed below its 250-day simple moving average (DSMA), signaling potential further declines. Analysts warn that Bank Nifty could drop to its next key support level at 47,300. The broader market, particularly mid- and small-cap indices, has been more severely impacted, reflecting concerns about stretched valuations and weak earnings expectations. This sharp correction highlights the vulnerability of these segments to shifts in market sentiment.
While the recent selloff has been broad-based, certain sectors have shown relative resilience. IT, FMCG, and some pharma stocks have displayed more stability compared to others. On the other hand, realty, metals, consumer durables, and media stocks have borne the brunt of the correction. Given the heightened volatility, characterized by a 7.25 percent rise in the India VIX to 16, analysts recommend a cautious approach. Investors are advised to prioritize risk management, focusing on stock-specific opportunities within relatively stable sectors like IT and pharma, while avoiding overexposure to high-beta segments. This cautious strategy aims to navigate the market uncertainty and protect investment portfolios during this period of heightened volatility.