The Indian stock market has recently faced a significant downturn, marking its longest monthly losing streak in over 23 years. Both the Nifty 50 and Sensex indices have experienced declines of approximately 3% in January 2025, with cumulative drops of 12.6% and 11.7%, respectively, since their peaks in September 2024.
Several interrelated factors have contributed to this decline:
1. Weak Corporate Earnings: The downturn began in October 2024, following quarterly earnings reports where a substantial number of companies either met or missed market expectations. This performance eroded investor confidence, leading to subsequent declines in the following months.
2. Foreign Portfolio Investor (FPI) Outflows: January 2025 witnessed FPIs withdrawing $8.3 billion from the Indian market, intensifying selling pressures. This trend was influenced by a strengthening U.S. dollar, concerns over potential U.S. tariffs, and sluggish domestic growth.
3. Regulatory Measures Impacting Banking Profits: The Reserve Bank of India’s (RBI) recent measures to curb retail lending have led to a slowdown in credit growth. Consequently, banks have increased provisions for bad loans, and there has been a rise in non-performing assets. For instance, HDFC Bank increased its loan loss provisions by 17% and saw an uptick in its non-performing assets ratio.
4. Currency Depreciation: The Indian rupee has resumed its downward trajectory, influenced by potential capital outflows and corporate hedging activities. As of January 27, 2025, the rupee was trading at 86.3675 against the U.S. dollar, depreciating from 86.2050 in the previous session.
5. Elevated Stock Valuations Amid Economic Challenges: High stock valuations, coupled with a challenging macroeconomic environment, have made the market susceptible to corrections. Small-cap and mid-cap indices have been particularly affected, each declining by approximately 15% and 10%, respectively, in January 2025, maintaining a bear market trajectory.
6. Geopolitical Tensions and Global Economic Factors: Escalating geopolitical tensions, such as the Iran-Israel conflict, have introduced uncertainties in global markets. Additionally, China’s recent economic stimulus measures have attracted foreign investments away from India, further contributing to the market’s decline.
Thus, the recent downturn in the Indian trading market is the result of a confluence of factors including weak corporate earnings, significant foreign investor outflows, regulatory impacts on the banking sector, currency depreciation, high stock valuations amidst economic challenges, and global geopolitical tensions. These elements have collectively eroded investor confidence, leading to the observed market decline.
