Stock Market Crash: Reasons behind Sensex and Nifty 50's struggle in the past six months

The Indian stock market has been facing a prolonged slump, with the BSE Sensex dropping 10,677 points from its record high of 85,978, and the Nifty 50 index falling by 3,482 points from its peak of 26,277 on September 26, 2024. Despite attempts to recover, with mid-cap and small-cap stocks showing promise, the market remains in a bearish grip, continuing to face downward trends for more than two weeks. The primary reasons behind this slump can be traced to both domestic and global economic factors.

1. Slowing Growth and Overvaluation India's long-term growth prospects remain strong, but near-term concerns about sluggish corporate earnings and high valuations have led to profit-booking. Compared to other emerging markets, India's stock market is trading at a premium, causing investors to reassess their positions. Additionally, a strong US dollar often attracts capital to US markets, viewed as safer, leading to Foreign Institutional Investor (FII) outflows from India.

2. Inflation Concerns Inflation remains a major worry globally. In the US, inflation expectations are rising, especially among political independents and Democrats. Weak housing sales and high mortgage rates have further fueled fears of a prolonged inflationary period. These concerns have spilled over into global markets, including India, where inflation remains a critical factor in investor sentiment.

3. London Cash Gold Contract and Global Trade Concerns Global trade uncertainties have added to the market's struggles. The US-EU tariff dispute has created tension, leading to concerns about possible tariffs on gold, which is affecting its price. Anticipations of such tariffs have driven demand in the US, pushing gold prices higher. Major banks are shifting gold reserves to the US to take advantage of these price discrepancies, which has added to global market volatility.

4. Hawkish US Federal Reserve Policies The US Federal Reserve's stance on interest rates has also impacted global markets. The Federal Reserve's recent meeting minutes hinted that the US is unlikely to cut interest rates until it is confident in managing US inflation. This hawkish tone has strengthened the US dollar, which has led to increased selling pressure in Indian markets as foreign investors seek stability in the US.

5. Shift from India to China In recent months, Chinese stocks have become increasingly attractive to investors, particularly after the Chinese government introduced a series of fiscal and monetary measures to boost growth. Foreign investors are shifting funds from India to China, driven by the expectation of better returns. The Hang Seng index, for instance, surged by 18.7% in just a month, while the Nifty 50 saw a modest decline. This "Buy China, Sell India" trend is gaining momentum, though experts caution that it may not last long, given China's underlying structural problems.

The Indian stock market's current struggle is driven by a combination of sluggish growth, inflation fears, global trade uncertainties, US Federal Reserve policies, and shifting investor interest towards China. While these factors have caused significant turmoil, analysts suggest that a potential consolidation phase or earnings-driven growth could help reset valuations and attract renewed investor confidence. However, global conditions remain volatile, and investors are advised to stay cautious.