October is turning into a bitter month for the stock market, with Nifty down 6% and Sensex losing over 4,800 points over the past month. In fact, this pre-Diwali period stands as the worst for investors in the last decade.
Historically, the month before Diwali tends to be more optimistic, with an average return of 0.84%. Since 2014, Nifty has shown negative returns before Diwali only four times. The last time the markets took such a hit was in 2015 when Nifty fell by 4.45% in the lead-up to Diwali. But this year, it’s on track to break even that record, with last year’s mild dip of 1.36% feeling like a distant memory.
Today was particularly rough. Indian equity indices plummeted, with Sensex dropping over 700 points and Nifty slipping below the 24,150 mark. Disappointing Q2 earnings from key players like IndusInd Bank and NTPC, paired with continuous foreign fund outflows, played a significant role in this plunge.
The total market capitalization for all listed companies on the BSE dropped by ₹7.7 lakh crore, settling at ₹436.1 lakh crore.
What’s Behind the Selloff?
Several factors have soured the market mood.
After Bernstein’s recent downgrade, Goldman Sachs also shifted India’s rating from “overweight” to “neutral” due to slowing economic growth. The downgrade hints at weakened faith in India’s growth story, which, alongside elevated valuations and sluggish earnings, has pushed foreign institutional investors (FIIs) to rethink their strategies. FIIs pulled out ₹86,000 crore, channeling funds into markets like China, where valuations seem more favorable.
On the other hand, domestic institutional investors (DIIs) have tried to offset this outflow, pouring in ₹93,000 crore. But as FIIs continue to exit, the question is can retail investors sustain their confidence in Indian equities?
For some market watchers, this correction phase is a buying opportunity, especially for those with a long-term perspective. Smaller stocks, which are often popular with retail investors, have taken a heavier hit. For instance, PSU defense stock Cochin Shipyard has dropped a steep 52% from its 52-week high, reflecting the broader market’s ongoing struggle.
Market Sentiment, Diwali’s Usual Spark Missing
Diwali generally brings a positive vibe to the market. As an auspicious festival, it usually renews investor confidence and optimism. However, with this year’s economic and corporate indicators looking grim, the usual festive boost has been overshadowed by caution. Analysts point out that the market’s focus has shifted from momentum to quality, and the traditional “buy on dips” strategy has largely morphed into a “sell on rally” approach until signs of economic recovery appear.
Today’s market selloff included significant losses from major players. IndusInd Bank, M&M, L&T, and ICICI Bank dragged the Sensex down by 445 points. Reliance Industries, HDFC Bank, SBI, and NTPC also contributed to the downward spiral. On the sectoral front, Nifty Auto, Bank, Metal, PSU Bank, Realty, and Consumer Durables sectors all saw declines between 2% and 3.6%. The fear gauge, India VIX, spiked by 5.9%, reaching 14.8—a sign of rising anxiety in the market.
Key Factors Behind the Market’s Decline
Several factors have weighed on the markets recently, leading to significant drops in key indices. Here’s a breakdown of what’s driving this downward trend:
1. Weak Q2 Earnings
Recent earnings reports from blue-chip companies have left investors disappointed. Key players like IndusInd Bank and NTPC faced substantial declines after missing expectations, putting extra pressure on benchmark indices. In today’s trading, IndusInd Bank dropped 19%, shaving off 130 points from the Sensex, while NTPC fell by 4%. These losses highlight how lackluster quarterly results from top firms are dampening market sentiment.
2. Foreign Investor Selling
Foreign institutional investors (FIIs) have been selling Indian shares consistently over the past 19 sessions. This trend has been fueled by a shift in focus toward China, where government stimulus measures and relatively lower valuations have attracted investors. As of October 24, FII net selling had reached ₹98,085 crore, a correction largely driven by this sustained foreign outflow.
3. High Bond Yields and a Strong Dollar
High U.S. bond yields and a strengthening dollar are other big factors weighing on Indian equities. Although the 10-year U.S. Treasury yield ticked slightly down to 4.1918%, it remains elevated above 4%, having reached a three-month high earlier this week. The strong dollar, too, continues to apply pressure, with the dollar index advancing by 0.56% this week. Both high bond yields and a stronger dollar tend to lead to foreign fund outflows from emerging markets like India and can push up import costs, which eventually trickles down to corporate earnings.
4. Uncertainty Around the U.S. Election
The U.S. election is adding another layer of unpredictability. With a tight race between former President Donald Trump and Vice President Kamala Harris, markets are watching closely as this could influence economic policy and market sentiment. Rising speculation that Trump may win certain states has already impacted U.S. yields and the dollar, as his policies on taxes and tariffs could heighten inflation.
5. Fading Hopes for Aggressive Rate Cuts
The U.S. Federal Reserve’s future rate-cut plans are also weighing on market dynamics. Currently, markets are pricing in a 95.1% chance of a 25-basis-point cut at the Fed’s upcoming meeting. However, this is a stark difference from a month ago when a more substantial rate cut seemed likely. With rate-cut prospects now dialed back, investors are less optimistic about easing borrowing costs in the near future.
Snapshot
These combined factors have set a challenging backdrop for Indian markets. With Q2 results disappointing, sustained FII outflows, rising U.S. bond yields, election uncertainties, and dwindling hopes for major Fed cuts, investors may continue to feel the pressure in the weeks ahead.
As Diwali approaches, the uncertainty looms, making it challenging for investors to see a clear path forward. The recent correction may provide an attractive entry point for some long-term investors, but caution remains the prevailing mood until signs of sustained earnings and consumption growth emerge.
