Indian Stock Market Slumps for 10th Day as $14 Billion Exits—Will the Slide Continue?

India’s stock market is undergoing its longest-ever losing streak, with the NSE Nifty 50 Index falling for the 10th consecutive session on Tuesday. The index dropped another 0.2%, bringing total losses to 16% from its peak in September 2024. The ongoing selloff is primarily driven by foreign investors, who have withdrawn nearly $14 billion from Indian equities this year amid concerns over economic slowdown, high stock valuations, and shifting global investment trends.

Foreign Investors Exit Indian Equities at an Alarming Pace

Global institutional investors, who once viewed India as a key emerging market, are now offloading their holdings at a record pace. Several factors have contributed to this exodus, including:

• Rising U.S. Interest Rates: Higher interest rates in the U.S. have made American assets more attractive, reducing the appeal of riskier emerging markets like India.

• Strong U.S. Dollar: A stronger dollar has made investing in India less profitable for global funds, leading to capital outflows.

• Chinese Market Rebound: After a prolonged slump, Chinese stocks are seeing renewed interest, diverting funds away from Indian markets.

• India’s High Valuations: Compared to other emerging markets, Indian stocks are seen as overvalued, making them less attractive in a global context.

The selloff marks a sharp reversal from last year when India was a top choice for foreign investors. Now, with global economic uncertainty mounting, funds are reallocating their capital to markets with lower valuations and clearer economic outlooks.

Retail Investors Face Growing Uncertainty as Markets Slide

The sharp market downturn is particularly concerning for India’s growing base of retail investors, many of whom started investing in the last few years and have never experienced a sustained correction. According to the National Stock Exchange of India (NSE), participation from small investors in cash equities has hit a nine-month low, signaling declining confidence.

• New Investors Facing First Major Market Correction: Over two-thirds of India’s retail investors entered the market in the past five years, meaning they have only seen strong bull runs and are unprepared for sustained declines.

• Psychological Impact of Market Volatility: Market experts warn that prolonged weakness could lead to panic selling among retail investors, further pressuring stock prices.

• Concerns Over Margin Trading: Many new investors have relied on margin trading, where borrowed money is used to buy stocks. As stock prices drop, margin calls are forcing traders to sell, accelerating the downturn.

While domestic investors have historically provided support during market corrections, there are fears that if this trend continues, even local participation could weaken, deepening the selloff.

Government Steps In to Stabilize Market Sentiment

Recognizing the severity of the market downturn, the Indian government has introduced several measures aimed at stabilizing investor confidence and boosting economic activity.

• Policy Support for Key Sectors: The government has announced initiatives to boost domestic consumption, which could help companies recover from weak earnings.

• Trade Negotiations with the U.S.: Talks are underway to prevent additional tariffs on Indian exports, which could have a significant impact on corporate earnings.

• Infrastructure and Manufacturing Growth Plans: The government is pushing infrastructure spending and incentives for domestic manufacturing to create long-term economic stability.

Finance Ministry officials have also urged long-term investors to stay the course, emphasizing that India’s economic fundamentals remain strong despite short-term market fluctuations.

Market Analysts Divided on Timing of Recovery

The big question now is whether Indian markets will stabilize soon or if further declines are likely. Experts remain divided on the timing of a potential rebound.

• Bullish View: Some analysts believe that the recent selloff has been overdone and that the market is nearing a bottom. Oversold conditions and declining demand for hedges suggest a potential short-term recovery.

• Bearish View: Others argue that weak corporate earnings and India’s still-high valuation premium over other emerging markets could prolong the downturn. According to MSCI data, Indian stocks have shown the weakest earnings revision momentum among major developing economies, raising doubts about near-term recovery.

• Global Economic Factors: The pace of U.S. interest rate hikes and China’s economic recovery will also play a role in determining when Indian markets stabilize.

For now, investors are adopting a cautious approach, with many waiting for stronger earnings data or clearer signals from global markets before making new investments.

Small- and Mid-Cap Stocks Most Vulnerable to Further Declines

While blue-chip stocks may find some stability due to strong fundamentals, small- and mid-cap stocks remain the most vulnerable to further declines.

• Liquidity Risks: These stocks often face lower trading volumes, making them more susceptible to sharp price swings during volatile periods.

• Overvaluation Concerns: Many small-cap stocks saw massive price surges in 2023, pushing valuations to unsustainable levels. The current correction is forcing a reality check on prices.

• Institutional Selling: Large investors are prioritizing safety by moving funds out of riskier small- and mid-cap stocks, leading to even sharper declines in this segment.

“We don’t think the correction is completely over yet, but we may be in the final stages,” said Vivek Dhawan, fund manager at Candriam. He emphasized that investors should be prepared for continued volatility, especially in smaller companies.

Will Markets Recover or Extend Their Losses?

With global and domestic uncertainties still weighing on investor sentiment, the coming weeks will be crucial for the Indian stock market. Some of the key factors to watch include:

• Foreign Fund Flows: If foreign investors begin returning, it could provide a much-needed boost.

• Earnings Reports: Strong corporate earnings could help stabilize markets and rebuild confidence.

• Government Policy Moves: Any new stimulus measures or trade agreements could influence market direction.

For now, investors are bracing for continued volatility, with hopes that clearer policies and a stabilizing global economy could help Indian markets find a firmer footing.

Also Read: India's Economic Slowdown: Impact on Stock Market and Investment Opportunities