The Indian stock market witnessed a brutal sell-off on Tuesday, leaving investors rattled as benchmark indices, the BSE Sensex and Nifty50, extended their losing streak for the fifth consecutive session. The Sensex nosedived by over 1,000 points, closing at 76,293.60, while the Nifty50 slipped below the 23,100 mark, ending the day at 23,071.80. Both indices recorded a sharp decline of 1.32%, marking one of the worst trading sessions in recent months. But what exactly caused this crash? Let’s break it down.
1. Global Trade War Fears
One of the primary reasons behind the market crash was the growing uncertainty over global trade tensions. US President Donald Trump’s announcement of imposing a 25% tariff on steel and aluminium imports sent shockwaves across global markets. This move has raised fears of a potential trade war, prompting foreign institutional investors (FIIs) to pull out funds from emerging markets like India. The Indian rupee hit a record low against the US dollar on Monday, further exacerbating the situation.
2. Relentless Foreign Fund Outflows
FIIs have been on a selling spree, offloading Indian equities worth Rs 2,463 crore on February 10 alone. This relentless selling has been driven by a stronger US dollar and rising bond yields in the US, making emerging markets less attractive. The flight of foreign capital has put immense pressure on Indian indices, leading to a sharp decline.
3. Weak Global Cues
Asian markets mirrored the weakness, with the MSCI Asia ex-Japan index falling 0.3%. The global sell-off was triggered by concerns over rising inflation and tighter monetary policies by central banks worldwide. Investors are also closely watching Federal Reserve Chair Jerome Powell’s upcoming speech for clues on future interest rate movements, adding to the uncertainty.
4. Broader Market Underperformance
The crash was not limited to large-cap stocks. The broader markets witnessed steeper declines, with the Nifty Midcap 100 index plunging over 3% and the Nifty Smallcap 100 index tumbling 4%. Over the past five sessions, both midcap and smallcap indices have lost nearly 8.6% and 11.3% respectively, significantly underperforming the Nifty, which is down only 1.52% year-to-date.
5. Sectoral Weakness
Sectorally, Nifty Auto, Media, Pharma, PSU Bank, Healthcare, and Oil & Gas indices fell between 1% and 1.5%. Private bank and auto stocks were among the worst hit, dragging the indices lower. Eicher Motors, for instance, slumped 6.8% post its Q3 results, leading Goldman Sachs to slash its target price to Rs 5,900.
6. Overvaluation Concerns
Market experts have been warning about the overvaluation of midcap and smallcap stocks for some time now. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted, “The relentless selling by FIIs in largecaps has made their valuations fair, while mid and smallcaps remain overvalued. FIIs will return to Indian markets only when the dollar weakens.”
7. Technical Indicators Signal Further Downside
From a technical perspective, the Nifty has formed a bearish candlestick on the daily chart, indicating negative sentiment. Aakash Shah, Equity Research Analyst at Choice Broking, pointed out that the index faces key resistance at 23,460. “A breakdown below the immediate support level of 23,260 could push the index towards 23,000,” he warned.
8. Oil and Currency Volatility
Oil prices remained stable on Tuesday, with Brent crude futures edging up by 11 cents to $75.98 per barrel. However, the Indian rupee strengthened slightly by 10 paise to 87.35 against the US dollar, even as the dollar index climbed 0.08% to 108.4. The volatility in oil prices and currency markets has added to the overall uncertainty.
What Lies Ahead?
The Indian stock market is likely to remain under pressure in the near term, given the global uncertainties and persistent foreign fund outflows. Analysts suggest that investors should focus on large-cap stocks with strong fundamentals, as the broader market correction is expected to continue.
In conclusion, the market crash was a result of a perfect storm of global trade tensions, foreign fund outflows, weak global cues, and overvaluation concerns. While the road ahead may be bumpy, staying cautious and informed will be key for investors navigating these turbulent times.