Sensex, Nifty 50 crash nearly 1%, investors lose ₹6 lakh crore; 5 key factors behind Indian stock market’s fall

Stock market crash today: The Indian stock market witnessed a widespread selloff on Friday, October 25. The benchmarks—the Sensex and the Nifty 50—declined almost a per cent each, while the mid-and small-cap segments dropped 2 per cent.

Sensex fell 663 points, or 0.83 per cent, to close at 79,402.29, while the Nifty 50 declined 219 points, or 0.90 per cent, to end at 24,180.80. The BSE Midcap and Smallcap indices fell 1.48 per cent and 2.44 per cent, respectively.

The overall market capitalisation of the firms listed on the BSE plunged to nearly ₹438 lakh crore from nearly ₹444 lakh crore in the previous session, making investors poorer by about ₹6 lakh crore in a single day.

The volatility index India VIX jumped nearly 5 per cent to 14.63, indicating nervousness among market participants.

It was the fifth consecutive session of losses for the Sensex and the Nifty 50. The Sensex fell 2.2 per cent this week, while the Nifty 50 had dropped 2.7 per cent.

Both the Sensex and the Nifty 50 are now down about 8 per cent from their all-time highs of 85,978.25 and 26,277.35, respectively, which they hit on September 27. 

Why is the Indian stock market falling?

Here are five key factors that could be behind the recent market fall:

1. Heavy foreign capital outflow

Experts see aggressive selling by foreign portfolio investors (FPIs) as the primary reason behind the market crash. Data shows that FPIs sold Indian equities worth over ₹98,000 crore in October.

Due to the cheaper valuation of Chinese markets, FPIs have been redirecting their funds into Chinese stocks after Beijing announced recent measures to stabilise its struggling economy capital markets.

“The FPI selloff is unprecedented. They had not sold Indian equities worth this much even during the COVID-19 crash and global financial crisis. With the massive, sustained and unprecedented selling by the FIIs, which has touched ₹98,085 crore this month up to 24th, the buy-on-dips strategy is not working,” said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Prashanth Tapse, Senior VP (Research), Mehta Equities, observed that continued selling from FII, followed by disappointing Q2 Earnings across the sectors and valuations mismatch, are fuelling markets to shed around 8 per cent from Nifty's all-time high.

"FIIs are selling Indian equities to invest in relatively cheaper countries like China, especially after the Chinese government announced stimulus to boost its slowing economy. This situation has come after a long time when domestic markets have been underperforming for local reasons," said Tapse.

2. Weak Q2 earnings

India Inc.'s September quarter earnings have been weak, aggravating concerns about the market's stretched valuations.

"Corporate results for the second quarter, announced so far, show that the Indian company's revenue and profit growth rates have slowed," said Tapse.

Brokerage firm Kotak Institutional Equities, in its recent report, highlighted that the poor Q2FY25 earnings season has indicated subdued trends across various sectors. The brokerage remains concerned about possible risks to profitability and volumes across various sectors because of disruptions and companies' emphasis on profitability.

According to Vijayakumar, the consensus downward revision in the FY25 earnings estimate and the weak Q2 numbers have soured the sentiments to a slightly bearish mode.

"Q2 numbers have been subdued, and the concern is that along with weak rural consumption, we also have weak urban consumption, as indicated by companies such as Hindustan Unilever and Nestle. Earnings growth in FY25 may be around 10 per cent or even lower than that," said Vijayakumar.

3. US election 2024

Uncertainty surrounding the US election is weighing on market sentiment. Less than two weeks before the November 5 election, the latest opinion poll trends show a close fight between Kamala Harris and Donald Trump.

According to Deepak Jasani, the head of retail research at HDFC Securities, if Kamala Harris becomes president, she may carry forward most of the Biden administration's trade policies. On the other hand, Trump may pursue a more transactional approach with greater scrutiny of the trade imbalance and migration.

"Although it is a close call, there is a possibility of Trump returning. He is a negotiator and may not take steps to damage the market completely. However, if he imposes taxes and higher tariffs, it may impact global trade and the economy," said Vijayakumar.

4. Geopolitical factors

Evolving situations in the Middle East have been influencing market sentiment. According to a Reuters report, Israel's military on Thursday said it killed a Hamas commander who took part in the October 7, 2023, attack on southern Israel.

Meanwhile, media reports suggested US and Israeli authorities will meet in Doha to prepare for renewed talks on a Gaza ceasefire deal.

5. Valuation still at uncomfortable levels

Experts point out that the market is still not at justified valuations which is contributing to market selloff.

According to Trendlyne data, the current price-to-earnings (PE) ratio of Nifty 50 at 22.8 is above its one-year and two-year average PE of 22.6 and 22.2, respectively.

"We still do not have a buyable comfort despite the recent correction. The current market valuation still remains high," said Vijayakumar.

What should investors do?
 

Periodic market declines are normal. However, growth potential and corporate earnings influence the market in the long term.

"With the economy at an inflexion point, thanks to the progressive policy environment and robust macroeconomic management, the growth visibility and the economy's ability to sustain it has significantly increased," said Ritwik Bhattacharjee, Head - BD, Research and Valuation of Khambatta Securities.

Tapse said all past declines look like opportunities, and all future declines look like risks, but the ongoing selloff looks like an opportunity for new long-term investors to accumulate best-in-class fundamentally strong business models.

“The right investment strategy for going all-in in markets is to allocate funds phase-wise. However, short-term volatility will remain,” said Tapse.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.