India’s equity markets experienced a sharp decline on Thursday, December 19, marking the fourth consecutive session of losses. Both the SENSEX and NIFTY50 indices fell significantly, with widespread sell-offs across sectors, eroding investor wealth by an estimated ₹8 lakh crore this week. The situation has left many wondering about the factors behind this substantial market downturn.
Market Highlights:
- SENSEX: Down by 958 points (1.20%) at 79,223.
- NIFTY50: Declined by 246 points (1.02%) to 23,952.
- Sectoral Performance: The NIFTY Pharma index was the only sector in positive territory, while NIFTY Bank, IT, and Metal indices saw steep declines.
- Top Losers: Asian Paints, Bajaj Finance, and JSW Steel were among the hardest-hit stocks.
Cumulatively, the SENSEX has dropped 2,830 points (3.5%) in four sessions, while the NIFTY50 has shed over 800 points (3.3%). The steep fall has sparked investor concerns, and here are five key reasons driving this downturn.
1. Revised US Federal Reserve Outlook
The US Federal Reserve’s decision on interest rates has had a cascading effect on global markets. On Wednesday, the Fed cut its benchmark interest rate by 25 basis points, aligning with expectations. However, what unsettled investors was the revised outlook for 2025.
- Rate Projections: The Fed lowered its target range to 4.25%-4.5% but indicated rates would only drop to 3.9% by the end of 2025, compared to the earlier projection of 3.4%.
- Market Reaction: Expectations of fewer rate cuts—just two in 2025 compared to three or four earlier—spooked investors, triggering a sell-off in equities.
2. Global Market Sell-Off
The US markets reacted sharply to the Fed’s announcement, leading to significant declines:
- Dow Jones: Fell 1,123 points (-2.6%).
- Nasdaq: Dropped 716 points (-3.6%).
- S&P 500: Declined over 178 points (-3%).
This sell-off rippled across global markets, with Asian indices also witnessing sharp declines:
- Japan’s Nikkei: Down by 0.8%.
- China’s CSI 300: Slipped 0.47%.
- Hong Kong’s Hang Seng: Dropped 1.28%.
The global downturn added to the pressure on Indian equity markets, contributing to the current bloodbath.
3. Indian Rupee Hits Record Low
The Indian rupee plummeted to an all-time low of 85.3 against the US dollar on Thursday, further dampening investor sentiment. A weakening rupee impacts Indian markets in several ways:
- Reduced Attractiveness: Dollar-denominated investments become more appealing than rupee-based assets like equities or gold.
- Increased Costs: A weaker rupee raises costs for import-dependent businesses, negatively affecting profitability.
The currency’s depreciation added another layer of concern for both domestic and foreign investors.
4. Foreign Institutional Investor (FII) Outflows
Foreign institutional investors have been aggressively selling Indian equities, contributing significantly to the market correction.
- Sell-Off Data: FIIs sold equities worth ₹1,316.81 crore on December 18 alone, with total outflows exceeding ₹8,000 crore since Monday.
- Strengthening Dollar Index: A robust dollar index, which reached a two-year high on Thursday, has made Indian equities less attractive to foreign investors.
Persistent FII outflows have exacerbated market volatility, with the strengthening dollar drawing more investors toward safer US-based assets.
5. Uncertainty Around Q3 Earnings
Investor caution has been amplified by concerns about corporate earnings for the third quarter (Q3 FY25), which ends in December 2024.
- Previous Earnings Disappointment: Earnings for Q2 FY25 fell short of expectations, with GDP growth slowing to 5.4% during the quarter.
- Market Sentiment: Weak economic indicators and subdued corporate performance have made investors wary, leading to a defensive stance ahead of the Q3 earnings season.
The Bigger Picture: Investor Wealth Erosion
This week’s market rout has resulted in a loss of nearly ₹8 lakh crore in investor wealth. The market capitalization of companies listed on the BSE dropped to ₹4,49,65,595 crore on Thursday from ₹4,57,09,259 crore on Friday, December 13.
The sell-off reflects not just domestic factors but a confluence of global cues, currency depreciation, and market uncertainty.
What Lies Ahead?
Investors are advised to tread cautiously in the coming weeks. The combination of global economic uncertainty, a weakening rupee, and upcoming earnings reports calls for a strategic approach to portfolio management. Diversification across asset classes and a focus on fundamentally strong stocks may help mitigate risks in such volatile times.
Conclusion:
The recent stock market crash is a reminder of the interconnectedness of global financial systems and the impact of macroeconomic factors. While the short-term outlook may appear grim, long-term investors should focus on staying informed and making disciplined decisions to navigate market volatility effectively.