The Indian stock market has experienced a significant downturn in the past three days, with the Sensex crashing by nearly 2,000 points. On Wednesday, December 18, both the Sensex and Nifty 50 indices fell sharply, reflecting investor concerns. The market faced widespread selling, affecting not only blue-chip stocks but also midcap and smallcap shares. The market capitalization of BSE-listed companies dropped by nearly ₹6 lakh crore during this period, leading to significant losses for investors.
But what exactly is driving the recent slump in the Indian stock market? Here are five key factors that experts believe are behind the current market downturn:
1. Caution Ahead of US Fed Policy Outcome
One of the major factors influencing the Indian stock market is global sentiment, particularly regarding the US Federal Reserve’s monetary policy. The US Federal Open Market Committee (FOMC) held its two-day policy meeting starting December 17, and its outcome was eagerly awaited. With inflation still high in the US and concerns about slowing economic growth, there is a lot of uncertainty surrounding the Fed’s next move.
Market participants are anxiously awaiting the policy decision, as it could have a profound impact on global financial markets. If the Fed signals more interest rate hikes or maintains a hawkish stance, it could lead to tighter global liquidity, further affecting investor sentiment and stock market performance in India.
2. Rupee’s Weakness
The Indian rupee has been under immense pressure, plunging to a record low of 84.95 per dollar on Wednesday. The strengthening US dollar has contributed to this decline, and experts predict that the rupee could breach the 85 per dollar mark in the coming days. A weaker rupee impacts various sectors, particularly those reliant on imports, and can also weigh down domestic market sentiment.
The depreciation of the rupee accelerates foreign capital outflows, as investors tend to shy away from markets where the currency is weakening. This adds to the negative pressure on the stock market, as seen in the recent selling by foreign portfolio investors (FPIs).
3. Foreign Capital Outflow
FPIs have resumed selling Indian equities in recent days, further exacerbating the market decline. On December 17, FPIs sold Indian stocks worth ₹6,409.86 crore, adding to the ₹278.70 crore worth of sales on December 16. While FPIs had been net buyers earlier in the month, the strengthening US dollar, rising US bond yields, and global uncertainties have led to renewed selling pressure in Indian markets.
Foreign investors typically seek higher returns, and with rising bond yields in the US and a stronger dollar, they may view India as less attractive. This outflow of foreign capital puts additional downward pressure on the market, contributing to the recent crash.
4. Deep Losses in Banking Heavyweights
Banking stocks have been among the top contributors to the recent market decline. Key banking giants such as HDFC Bank and ICICI Bank have faced significant losses in the past few sessions, dragging down the broader indices. On December 18, both of these banks were major drags on the Nifty 50, which led to a broader decline in the financial sector.
The Nifty Bank index fell by 1.32%, with the PSU Bank index and the Private Bank index also witnessing declines of 1.92% and 1.11%, respectively. As the banking sector is a crucial part of the Indian stock market, any significant losses here have a ripple effect on the broader market.
5. Global Economic Concerns and Market Volatility
In addition to domestic factors, global economic concerns are also playing a crucial role in the market’s decline. As the global economy faces challenges such as inflation, recession fears, and tightening financial conditions, market volatility has spiked. Investors are increasingly cautious, leading to risk-off sentiment across emerging markets, including India.
In particular, the uncertainty surrounding global economic growth and trade tensions are influencing investor behavior. This global headwind is further compounding the challenges faced by the Indian stock market.
Conclusion
The Indian stock market has endured a rough patch, with the Sensex losing nearly 2,000 points in just three days. While the immediate causes of this downturn can be traced to a combination of factors—ranging from concerns over the US Federal Reserve’s policy, a weakening rupee, and foreign capital outflows, to deep losses in the banking sector—the underlying sentiment remains one of caution. With global economic uncertainty and rising volatility, Indian markets are likely to continue facing pressure in the short term.
For investors, it’s essential to stay informed about these global and domestic developments, and to consider diversifying portfolios to navigate the market’s unpredictable nature.
