What Really Happened to the Indian Stock Market?

The Indian stock market declined for five straight months from October 2024 to February 2025. This was the second instance since the 1990s of pessimism weighing on Indian stocks for such a long time. By March 3, 2025, the NIFTY 50 had lost over 4,000 (15.6%) points from a peak of 26,216 in September 2024. The BSE SENSEX accompanied the benchmark index by shedding over 12,700 points (14.9%). If we zoom in a bit, both indices had declined almost 7% YTD by the beginning of March, taking a hit of over 5% in February 2025 alone.

So, what’s plaguing the stock market of the world’s fifth largest and fastest growing major economy?

Bleak Outlook for the Banking Sector

The Indian banking sector has been witnessing a dry season. After the disappointing Q3, the Q4 results further weakened investor confidence. The banking sector is under pressure due to sluggish interest earnings growth, which slowed by 7.2% y-o-y in Q3 . The demand for credit has been declining ever since the Reserve Bank of India’s (RBI, India’s central bank) raised borrowing costs. Plus, regulatory changes and tight liquidity are narrowing operating margins. Notably, this sector forms 30% of the NIFTY 50. The loss of investor confidence is evident in BANKNIFTY, the index that tracks the Indian banking sector’s performance. BANKNIFTY had plummeted 5.3% year-to-date by March 3, 2025.

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Trump Tariffs Threaten Trade

The second-time US President announced retaliatory tariffs on steel, aluminium and their derivatives. Consequently, most capital flowed out of small- and mid-cap telecommunications and IT stocks as well as metals and automobiles. Further weighing on the stock market, the February 11, 2025, announcement dragged the NIFTY 50 down 4.4% within three weeks.

However, the latest tariff could only be a move to arm-twist India (and many other nations) into cutting back on import duties. Or, shall we say, facilitating Trump’s America First agenda? India and the US plan to take bilateral trade to $500 billion by 2030[E3] . In 2024, the US had a trade deficit of $45.7 billion with India, meaning America imported $45.7 billion more in goods from India than it exported there.

Notably, the US is India’s largest export partner, accounting for nearly one-fifth of the latter’s export income. The tariff tantrum could dent Indian export income by $7 billion a year. On March 3, 2025, the Indian Trade Minister was on route to meeting Trump and negotiating the terms of goods exchange.

Source: CNN Business

FIIs Exit While DIIs Exercise Caution

Massive withdrawals from foreign institutional investors (FII) are the primary cause of the Indian stock market’s crash. FIIs offloaded over ₹46,000 crores in the last week of February 2025, which raised the total withdrawal since the beginning of the year to ₹1.33 lakh crores. The primary reason for FIIs selling is that the Indian rupee has declined 1.42% YTD. Most often, when foreign investors exit, domestic institutional investors (DII) take over and support the markets. However, DIIs are currently holding significantly large positions, and declining markets do not present profitable opportunities. Given the uncertainty surrounding the global and domestic markets, the caution seems justified.

But Where’s the Investment Going?

Given the level of global uncertainty and President Trump announcing that the tariffs against Canada, Mexico and China will be enforced, the US markets ended the last week of February in the red. Investors are frantically searching for a “safer” haven, given that the performance of the USD remains uncertain. The Indian retail investor is exiting equities and probably still struggling to find a reliable alternative avenue of investment. This is because even gold and silver, the two most trusted instruments of the Indian market, are also under pressure.

The surprising twist is that millions of dollars that flowed out of the Indian equity market haven’t landed where expected. Notably, the S&P 500 declined 0.67% through February 2025, while the NASDAQ plummeted 2.81% and the DXY only surged modestly. This means the safe haven dollar isn’t the go-to investment either. To top it all, BTC ended February 1.15% lower. So, capital isn’t (necessarily) flowing into the US or potentially high-yielding cryptocurrencies. Here’s what global investors could be chasing:

The Japanese yen (JPY) had surged 6.01% YTD while the Swiss franc (CHF) appreciated 2.07% YTD against the US dollar by March 4, 2025.

So, what is the Indian investor supposed to do?

Time to Exit the Indian Markets?

We don’t think so! And most Indian stock market analysts would agree. Indian indices are widely expected to be under correction. The 22,000 level is a known support level for the benchmark index NIFTY 50 that has taken a U-turn from the key level several times in the past. Since the elections in 2024, the stock market was under the Modi euphoria, and most equities were overvalued when Trump’s tariffs speed-bumped the momentum.

The good news for the Indian markets is that the sell-off is primarily technical and not driven by macro-level fundamental weaknesses. This means that as the markets absorb the latest US-Indian trade developments, the USD surges, and the earnings of other industries unfold, at least the domestic investor could take a sigh of relief.

The MSCI Global Standard Index rebalancing concluded on February 28, 2025. A total of 14 stocks have been affected. The weightage of eight stocks has been increased while that of four has been reduced, and one replaced. India’s weightage in the index has risen from 18.8% to 19%, although it is still at the third spot. The rejig is expected to drive nearly $1 billion into the Indian equity market. The MSCI has also released the date for three more Index Reviews in 2025, which will continue to impact the Indian equity markets.

All in all, the Indian economy is growing on strong fundamentals, and the third-time Prime Minister’s “Make India Great Again” vision is expected to pull the stock market out of its slump by Q2 CY2025. However, it is crucial that global geopolitical tensions do not stir a stronger sell-off. Some market veterans believe it is time to buy the dip for Indian retail investors.

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