Why is the Indian Stock Market Falling? Key Factors Driving the Decline

On Friday, January 10, the Indian stock market continued its downward trend, with both Sensex and Nifty 50 falling for the third consecutive session. The decline was more than half a percent for both indices during intraday trade. Sensex dropped over 500 points to a low of 77,099.55, while Nifty 50 fell by over 180 points to 23,344.35. 

The selloff was even more intense in mid and small-cap stocks, as the BSE Midcap and Smallcap indices lost up to 3%. This slump in the Indian stock market is due to a combination of factors that are interlinked, causing a negative outlook for Indian equities.

Why Market is Falling?

Here are key reasons contributing to the current downturn in the Indian stock market. Let’s explore these factors:

1. Focus on Q3 Earnings

As the earnings season for the December quarter (Q3) begins, traders and investors are adopting a cautious approach. Tata Consultancy Services (TCS), a leading player in India’s IT sector, reported Q3 numbers that were largely in line with market expectations. TCS’ results indicate that the IT sector continues to remain resilient. However, investors are also keeping an eye on the performance of other sectors. 

For instance, although banking majors are expected to report good results, the sell-off by foreign institutional investors (FIIs) is likely to prevent the banking sector from seeing positive movement in response to those results. In short, stock-specific action is expected as the earnings season progresses, making market behaviour unpredictable.

2. Rising US Bond Yields and Dollar

The US 10-year bond yields and the US dollar have both been rising, driven by strong economic data coming out of the US. The increase in US treasury yields has reached near eight-month highs as of Friday, January 10. This rise in yields is largely due to expectations that the US Federal Reserve will not cut interest rates significantly this year. 

As a result, foreign capital is flowing out of emerging markets like India, as higher bond yields and a stronger dollar make investments in those countries less attractive. For India, which is heavily dependent on foreign capital, these rising yields and the stronger dollar are putting downward pressure on the stock market.

3. Heavy Selling by Foreign Portfolio Investors (FPIs)

Foreign Portfolio Investors (FPIs) have been selling Indian equities at a significant pace. As of January 9, FPIs had sold more than ₹19,000 crore worth of Indian stocks. This trend of heavy selling is expected to continue due to uncertainties surrounding the economic policies of US President-elect Donald Trump and the US Federal Reserve’s approach to interest rates. 

The possibility of Trump’s trade policies affecting global trade, especially if protectionist measures are implemented, is creating unease among foreign investors. Additionally, the uncertainty over the Fed’s interest rate path is making FPIs wary about investing in emerging markets, including India. This heavy selling by FPIs has been one of the major contributors to the ongoing market decline.

4. Economic Growth Concerns

Another factor driving the fall in the stock market is the concern over India’s economic growth. According to the Ministry of Statistics & Programme Implementation, India’s GDP is expected to grow by only 6.4% in the financial year 2024-25, which is the lowest growth rate in four years. This slowdown is a sharp drop from the 8.2% growth rate achieved in the previous fiscal year. 

The slowing growth has raised concerns among investors, as there is a possibility of further downgrades to India’s economic outlook. This uncertainty about growth is also contributing to the weakening of the Indian rupee and foreign capital outflows. The negative sentiment is further compounded by the fact that global financial services firm 

5. Uncertainty Around US Federal Reserve Policies and Trump’s Tariff Measures

The recent strong US economic data and rising expectations of inflation in the US are contributing to fears that the US Federal Reserve may not implement as many rate cuts as previously expected. Additionally, there is growing concern about the policies of US President-elect Donald Trump. As he prepares to take office on January 20, speculation about his tariff policies and protectionist measures is creating uncertainty. Experts believe that these policies could drive up inflation, which would complicate the US Federal Reserve’s efforts to control price increases. If inflation rises due to these tariff measures, it would make it more difficult for the Fed to keep interest rates low, further complicating global market conditions and affecting Indian equities.

In conclusion, the Indian stock market is facing a combination of internal and external pressures, including weak global cues, the rising US dollar and bond yields, FPI selling, concerns over India’s economic growth, and uncertainty surrounding US policies under President-elect Trump. These factors have collectively created a negative sentiment, leading to declines in the stock market.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

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