The recent downturn in the Indian stock markets has left investors concerned, with the BSE Sensex plummeting over 1,400 points (1.9%) on February 28, 2025. This marks a continuation of the market’s decline since February 4, when the Sensex dropped from 78,500 to 73,000, shedding 6.7% of its value this year. While many have pointed to U.S. President Donald Trump’s tariff threats as a potential cause, experts argue that domestic factors are the primary drivers behind the market correction.
Key Reasons Behind the Market Fall
According to Anish Tawakley, Co-CIO, Equity, at ICICI Prudential Mutual Fund, the market’s decline is largely due to two domestic factors:
- High Valuations:
- The mid- and small-cap segments of the market were significantly overvalued, making a correction inevitable.
- Tawakley emphasized that the market had been signaling the need for a correction for some time.
- Economic Slowdown:
- The Indian economy has shown signs of slowing down over the past six months, leading to weaker demand.
- This slowdown has contributed to foreign portfolio investors (FPIs) pulling out funds from Indian markets.
Trump’s Tariffs: A Minor Factor
Tawakley dismissed the notion that Trump’s tariff threats are a major factor in the market’s decline. He pointed to China’s historical growth as an example, noting that the country sustained a 10% growth rate for decades despite facing tariffs and other external challenges.
“Tariffs are not a big factor. The Indian economy is fairly resilient as long as the current account deficit is fine and oil prices don’t skyrocket,” Tawakley said.
FPI Outflows and Market Valuations
The outflow of foreign portfolio investments (FPIs) has been a significant contributor to the market’s decline. However, Tawakley clarified that this is not solely due to external factors like tariffs. Instead, high valuations in the Indian market have made it attractive for investors, including MNC promoters, to cash out.
“It’s not just Trump’s tariff threats. Valuation levels in the Indian market made it relevant for some investors to exit,” he explained.
Economic Fundamentals Remain Strong
Despite the slowdown, Tawakley emphasized that the Indian economy’s fundamentals remain robust:
- Current Account Deficit: Under control.
- Inflation: Stable.
- Corporate and Bank Balance Sheets: Healthy.
The primary issue is weak demand, which Tawakley believes can be addressed through monetary and fiscal policy measures. The recent Union Budget, which included income tax cuts, is expected to boost consumption and investment. Additionally, continued support from the Reserve Bank of India (RBI) could help revive economic momentum.
Housing Sector: A Key to Recovery
Tawakley highlighted the housing sector as a critical area to watch. For the economy to regain momentum, housing prices need to ease to stimulate demand and recovery in housing activity.
“If monetary policy support continues and housing activity recovers, the economy should do well. That’s irrespective of what happens on tariffs,” he said.
Outlook for the Indian Economy
While the market correction may continue for a quarter or two, Tawakley remains optimistic about India’s long-term prospects. He believes that with the right policy support, the economy will regain its momentum, attracting capital flows once again.
Key Takeaways
| Factor | Impact on Market |
|---|---|
| High Valuations | Mid- and small-cap segments were overvalued, leading to a necessary correction. |
| Economic Slowdown | Weak demand over the past six months has contributed to FPI outflows. |
| Trump’s Tariffs | Minor factor; domestic issues are more significant. |
| Strong Fundamentals | Current account deficit, inflation, and corporate health remain stable. |
| Housing Sector Recovery | Critical for economic revival; easing prices could boost demand. |
In conclusion, while external factors like Trump’s tariffs may create short-term volatility, the primary reasons for the stock market’s decline are rooted in domestic issues. With the right policy measures and a focus on key sectors like housing, the Indian economy is well-positioned to recover and regain its growth trajectory.