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Understanding the Current Market Correction: Key Factors, Trends and Strategies

Since October 2024, the Indian equity markets have undergone a correction, with the Nifty50 and BSE Sensex declining approximately 13% from their September highs. This downturn has left investors anxious, with media headlines and social platforms amplifying fears and painting a bleak outlook. However, historical data shows that such corrections are a natural part of market cycles, often creating opportunities for long-term investors. The current market weakness stems from a combination of factors, including subdued corporate earnings, concerns over a potential US-led tariff war, and sustained selling by foreign portfolio investors (FPIs).


Major Factors Behind This Market Downturn

  • High Valuations in Small-Cap and Mid-Cap Stocks 

    Before the correction, mid-cap and small-cap stocks were trading at steep premiums. The Nifty Midcap 100’s price-toearnings ratio was 58% higher than the Nifty 50, leading to profit booking and valuation-driven selling. Small-cap and mid-cap stocks have experienced impressive gains over the past two years, with the Nifty Midcap 100 and Nifty Small cap 100 indices rising by 28% and 29% in 2024. However, this rally has led to these segments trading at substantial premiums compared to large-cap indices.


    As valuations became increasingly stretched, both retail and institutional investors started taking profits, causing a ripple effect throughout the broader market. The SEBI raised concerns about excessive valuations and potential manipulation in small-cap and mid-cap stocks, prompting stricter regulations and a wave of portfolio rebalancing.



  • Foreign Portfolio Investor (FPI) Selling Pressures

    FIIs have been consistent sellers since late 2024, withdrawing over ₹1.52 lakh crore between October 2024 and January 2025. In January alone, FPIs withdrew a significant Rs 69,000 crore from the Indian market, surpassing the Rs 67,000 crore invested by domestic institutional investors (DIIs) during the same timeframe. While FIIs have invested Rs 1,101 crore in the primary markets. Mid-cap and small-cap stocks are under notable pressure. Additionally, investors are treading cautiously ahead of the upcoming Union Budget and the Reserve Bank of India's monetary policy announcement next week.

    The persistent exodus of FPIs has been fueled by multiple factors, including the depreciation of the rupee, rising US bond yields, and expectations of a tepid earnings season. With the dollar index above 109 and the 10-year US bond yield above 4.6%, it is logical for FIIs to sell in emerging markets, particularly in the most expensive emerging markets like India.


  • Global Uncertainties and Trade Tensions

    Global factors have significantly impacted market sentiment. The US Federal Reserve’s hawkish stance on monetary policy has tightened global liquidity, increasing yields on US bonds. Additionally, trade tensions have escalated, with the US threatening tariffs on countries like Colombia, Canada, and Mexico. These uncertainties have created a risk-averse environment, leading to a flight of capital from emerging markets, including India.


  • Disappointing Q3 Earnings Muted Q3 FY25 earnings have dampened market sentiment, with significant declines in profits reported by several key companies. Tata Steel's net profit fell 43% YoY to ₹327 crore, while Indian Oil's profit dropped 64% to ₹2,873.53 crore due to inventory and forex losses. Coal India saw a 17% decline in profit to ₹8,491 crore. Weak earnings across major sectors, compounded by high borrowing costs, have driven market corrections and heightened investor caution.


  • Profit Booking and Pre-Budget Nervousness Ahead of the Union Budget 2025, investors have engaged in significant profit booking, adding to market volatility. Expectations of fiscal stimulus, such as income tax cuts or growth-oriented measures, have created uncertainty. Any disappointment in Budget announcements could further exacerbate the correction.


Learnings from Previous Corrections: Staying the Course

Market corrections, although unsettling in the short term, are not uncommon in the history of global and Indian stock markets. A closer examination of past corrections reveals the resilience of the market, with each correction being followed by eventual recovery.


  • 2015: Yuan Devaluation & Global Concerns Sensex had shed over 26% during April 2015 and February 2016 due to fears of a Chinese economic slowdown and a poor monsoon season in India. Despite initial panic, the market rebounded by the end of the year, aided by solid economic policies and a stabilizing global environment.


  • 2016: Demonetization & Political Uncertainty The demonetization announcement led to the Sensex falling 1,688 points or 6.12%, compounded by global instability from the US election and Brexit. However, the market regained strength in 2017 as investor confidence and global growth improved.



Market Resilience: The Long-Term Trend

Looking at Sensex data from 1980 to 2024, we can observe that market corrections are not only frequent but also part of a natural cycle. In fact, intra-year declines of more than 10% are common, yet over 80% of these years still ended with positive returns.

  • Small Declines (0% to -10%): In the 4 years with minor declines, the market ended positively each time.

  • Moderate Declines (-10% to -20%): Out of 23 years with moderate drops, 22 showed positive returns.

  • Large Declines (More than -20%): In 17 years of severe corrections, 9 years ended with positive returns.


This long-term resilience highlights that, even after significant drops, markets often recover and continue their upward trajectory, particularly after more moderate declines.

Regular investments, like SIPs, allow investors to benefit from cost averaging, making them more resilient to market fluctuations.


Navigating the Path Ahead

The recent correction in Indian equity markets reflects a natural adjustment in valuations rather than a crisis, with inflated prices returning to more realistic levels. While some companies have faced sharper declines, this phase highlights the market’s ability to separate strong performers from weaker ones. The shift from low-growth, low-quality segments to fundamentally sound companies is creating opportunities, with defensive sectors like healthcare and telecom gaining traction amidst global headwinds. India’s resilient domestic economy supports a constructive long-term outlook, making disciplined, goal-aligned investing essential.


We suggest maintaining a balanced equity allocation with a long-term perspective, as disciplined investing is essential during volatile periods. Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) are effective tools to manage market fluctuations, while hybrid funds offer diversification for investors seeking a balanced approach. Seasoned investors can consider selective investments in diversified multi-cap or flexi-cap strategies along with quality small-cap stock picking for those with a truly long-term horizon. Staying focused on asset allocation and embracing a long-term outlook is crucial to navigating short-term uncertainties and achieving sustainable growth.

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