Sensex dips 1,600 points in 5 days: 5 Key reasons behind the stock market slump

The Indian stock market is under significant pressure, with the Sensex falling over 1,600 points in the last five days, driven by multiple factors. On February 11, the Sensex opened at 77,384.98, but by the session’s end, it had dropped 403 points to 76,908.81. The Nifty 50 mirrored this trend, falling 131 points to 23,250.90. Smaller stocks performed worse, with the BSE Midcap and Smallcap indices each plunging over 2%. In total, investors have lost nearly ₹14 lakh crore as market capitalization dropped from ₹426 lakh crore to ₹412 lakh crore in just five days.

Experts point to five main reasons for the market downturn.

1. Massive FPI Selling: Foreign institutional investors (FIIs) have been pulling out from Indian stocks since October, driven by higher US bond yields and a stronger dollar. As of February 10, FIIs have sold stocks worth ₹12,643 crore in 2023, and since October, they have withdrawn over ₹2.75 lakh crore from the market.
2. Weak Q3 Earnings: Despite better-than-expected earnings for India Inc. in Q3, they have not met market expectations, leading to concerns about overpriced stocks. Notable disappointments include sectors like consumer staples, autos, and building materials.
3. Rupee Weakness: The rupee’s decline against the dollar has spooked foreign investors, causing increased outflows. On Monday, the rupee hit a near 88-level, a 3% fall for the year. This weakness was tied to fears of a trade war and prolonged economic disruption. However, the rupee regained some strength on Tuesday, rising 61 paise to 86.84.
4. Stretched Valuations: Despite the market correction, experts believe Indian stocks remain overpriced, especially with weak earnings expectations. Large-cap stocks have become more reasonably valued due to FII selling, but mid and small-caps remain expensive. According to valuation expert Aswath Damodaran, India’s market is the most expensive in the world.
5. Fears of a Trade War: US President Donald Trump’s tariff increases have fueled concerns over a global trade war, which could slow down economic growth and raise inflation. The recent 25% tariffs on steel and aluminum imports, particularly impacting Canada and Mexico, have heightened these fears. Investors are uncertain about the long-term effects of US policy shifts.

In summary, the stock market is facing a tough period due to foreign selling, weak earnings, a plunging rupee, high valuations, and global trade tensions. These factors have caused significant losses, leaving investors cautious about future prospects.