The Indian stock market witnessed a sharp decline on Monday, with the BSE Sensex plummeting by nearly 600 points and the NSE Nifty dropping close to 200 points in early trade.
This sudden crash has left investors and market analysts scrambling to understand the underlying causes. While the Reserve Bank of India’s (RBI) recent rate cut and the Bharatiya Janata Party’s (BJP) victory in the Delhi elections were expected to boost market sentiment, global and domestic factors have overshadowed these developments.
Here are five key reasons behind the market crash:
Trump’s Tariff Announcement: A Global Shockwave
The most immediate trigger for the market crash was the announcement by US President Donald Trump regarding new tariffs on steel and aluminium imports. Trump revealed plans to impose a 25% tariff on all steel and aluminium imports, in addition to existing duties. This move is part of a broader strategy to protect US industries, but it has sent shockwaves through global markets, particularly in countries like India that are heavily reliant on exports.
The Indian metal sector, which is already grappling with weak demand and pricing pressures, was hit the hardest. Major companies like Vedanta, Tata Steel, and JSW Steel saw their stock prices plummet by 3-5%. The Nifty Metal index dropped nearly 3%, reflecting investor fears of reduced demand and lower profitability due to the new tariffs. This sectoral decline contributed significantly to the overall market downturn.
Stretched Valuations: A Reality Check
Despite a recent correction, the Indian stock market remains one of the most expensive in the world. The Sensex has corrected over 9% from its all-time high of 85,978.25, hit in September last year. However, valuations continue to be stretched, particularly in the broader market. According to valuation guru Aswath Damodaran, the Indian market is the most expensive equity market globally, and one simply “can’t justify paying 31x earnings”.
Investors have become cautious as they await fundamental triggers such as GDP growth and earnings rebound. Until then, investors are likely to stick to high-quality large-cap stocks, leaving mid- and small-cap stocks vulnerable to further erosion.
Weak Corporate Earnings: A Persistent Drag
Weak corporate earnings have been a persistent issue for the Indian stock market. While the third-quarter earnings were marginally better than the previous two quarters, they failed to meet market expectations. This has weighed heavily on investor sentiment, as earnings growth is a critical driver of stock prices.
The lack of a strong earnings rebound has made investors skeptical about the market’s ability to sustain its upward trajectory. Companies across sectors, including banking, IT, and consumer goods, have reported subdued earnings, leading to a broader selloff. Until corporate earnings show a significant improvement, the market is likely to remain under pressure.
Relentless Foreign Capital Outflow: A Major Concern
Foreign institutional investors (FIIs) have been offloading Indian equities at an alarming rate. Since October last year, FIIs have sold Indian equities worth nearly ₹2.75 lakh crore. In February alone, they have offloaded equities worth over ₹10,000 crore. This relentless selling by FIIs has been one of the biggest reasons behind the recent market downturn.
The outflow of foreign capital is not just a reflection of weak domestic fundamentals but also a response to global uncertainties, particularly US trade policies. As FIIs continue to exit the Indian market, domestic investors are finding it difficult to absorb the selling pressure, leading to a sharp decline in stock prices.
Rupee’s Weakness: A Double Whammy
The Indian rupee hit an all-time low against the US dollar on Monday, slipping to 87.95 per dollar. This marks a decline of nearly 3% since the beginning of the year. A weaker rupee increases the cost of imports, particularly crude oil, and negatively impacts foreign investment sentiment.
The rupee’s weakness is a double whammy for the stock market. On one hand, it signals economic weakness, which dampens investor confidence. On the other hand, it accelerates foreign capital outflows, as foreign investors seek to protect their returns from currency depreciation. Analysts believe that if the rupee continues to weaken, the RBI may have to intervene to stabilise the currency, which could further impact market liquidity.
What’s Ahead?
While the BJP’s victory in the Delhi elections was expected to bring some stability to the market, global concerns and foreign investor activity have overshadowed this development.
In the short term, uncertainty over US trade policies and foreign investor selling could continue to weigh on the market. However, long-term investors may see this as an opportunity to accumulate high-quality stocks at lower valuations. As the market navigates through these challenges, investors should remain cautious and focus on fundamentally strong companies.
