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Downturn in Indian Stock Market
Context:
The Indian stock markets are witnessing a sharp correction, impacted by both global and domestic factors. The mid and small-cap segments have seen heavy corrections due to valuation concerns. Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs) have pulled out capital, leading to a liquidity crunch.
Reasons for the Downturn in Indian Market
- U.S. Trade Policies and Tariff Measures
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- The U.S. has restored tariffs on steel and increased aluminum duties to 25%, impacting Indian exports.
- Possibility of dumping of Asian steel into India, leading to oversupply and price cuts.
- Margins for Indian steel manufacturers have been affected (e.g., JSW Steel reported a ₹1,800 per ton decline in Net Smelting Return).
- India’s Directorate General for Trade Remedies (DGTR) is investigating potential dumping of steel products.
- FII and FPI Outflows
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- FIIs and FPIs are moving funds out of India due to:
- High valuations in mid and small-cap stocks.
- Better returns from U.S. treasury bonds.
- Concerns over India’s economic growth and earnings stability.
- As of 2025, ₹93,907 crore worth of equities have been sold by FIIs.
- FIIs and FPIs are moving funds out of India due to:
- Rising U.S. Bond Yields and Dollar Strength
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- Higher U.S. bond yields attract global capital away from emerging markets like India.
- This leads to a stronger U.S. dollar and depreciation of the Indian rupee.
- A depreciated rupee increases import costs, affecting inflation and corporate profitability.
- Correction in Mid and Small-Cap Segments
- Overinvestment in small and mid-cap funds in 2024 led to overvaluation concerns.
- Market correction is part of rationalising overvaluation.
- Liquidity outflows have pushed investors towards large-cap stocks.
- Economic Growth Concerns
- India’s GDP growth forecast for FY 2024-25 stands at 6.4%, lower than the 8.2% growth in the previous fiscal.
- Rupee depreciation and foreign capital outflows have impacted investor sentiment.
- Uncertainty Over U.S. Federal Reserve Policies
- The U.S. Federal Reserve recently cut interest rates by 0.25% but maintained a hawkish stance.
- Fewer rate cuts in 2025 are expected, making U.S. assets more attractive.
Relation Between Bond Yields and Stock Market
- Inverse Relationship Between Bond Yields and Equities
- Higher bond yields make fixed-income investments more attractive, leading to equity outflows.
- Investors shift from stocks to bonds, affecting stock market liquidity.
- Impact on Foreign Capital Flows
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- Rising U.S. bond yields result in capital outflows from Indian markets.
- This leads to rupee depreciation, making imports costlier and impacting inflation.
- Corporate Borrowing Costs
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- Higher domestic bond yields increase borrowing costs for Indian companies.
- Reduced investment and expansion plans affect overall economic growth.
Near-Term Market Outlook
- Volatility is expected to persist due to global trade uncertainties and geopolitical tensions.
- FIIs may return once earnings growth stabilises and the dollar weakens.
- Domestic liquidity through SIPs (Systematic Investment Plans) remains strong, offering some resilience.
- Large-cap stocks may remain stable, while mid and small-cap segments could continue facing corrections.
Steps the Government and RBI Should Take
- Policy Interventions for FII and FPI Retention
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- Implement favorable tax policies for FIIs and FPIs to encourage long-term investment.
- Provide stability in capital market regulations to boost investor confidence.
- Strengthening Domestic Economic Growth
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- Focus on infrastructure and manufacturing incentives to boost economic expansion.
- Enhance export competitiveness to counterbalance trade deficits.
- RBI’s Role in Maintaining Financial Stability
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- Liquidity infusion measures to support domestic investment.
- Careful intervention in forex markets to prevent excessive rupee volatility.
- Monitor inflation and interest rates to balance growth and stability.
- Steel and Manufacturing Industry Support
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- Protect domestic producers from dumping through anti-dumping duties.
- Incentives for value-added manufacturing to counteract global price pressures.
Conclusion
- The Indian stock market downturn is driven by global trade tensions, FII outflows, and U.S. policy shifts.
- Government interventions and RBI’s monetary measures are crucial to stabilising market sentiment.
- While short-term volatility persists, long-term growth prospects remain strong with the right policy actions.
