The relentless decline in the Indian stock market since last September is causing concern all around. The large cap-oriented bellwether indices, the Sensex and the Nifty 50, have lost around 14 per cent in the last five months. But the magnitude of the correction so far has been quite limited, compared with the decline in 2008 when the large cap indices had declined 64 per cent or in the Covid-induced crash in 2020, when the decline was 40 per cent. Other corrections in Indian market such as those in 2010 and 2015 had also dragged the indices more than 20 per cent from their peaks.
The ongoing correction is just a phase in the stock market cycle — of rallies followed by declines. Such declines are needed to drain out the speculative froth created by the preceding bull run. The ostensible reasons for the ongoing correction are foreign portfolio investors pulling money out of India due to slowing corporate profitability, weakness in the rupee and the negative impact of the US President Donald Trump’s policies on India. But India is among the worst performing stock markets this year because of institutional investors selling stocks to book profits made since 2020. The Indian stock market has been a stellar performer since the pandemic. While other emerging markets witnessed severe declines after the Russia-Ukraine conflict in 2022, the Indian stock market recovered quickly and went into a frenzied run thereafter.
The rally over the last two years has been led by the seven crore individual investors, who entered the stock market during or after the pandemic. Penny stocks, stocks with questionable fundamentals, stocks on the SME platform and IPOs witnessed feverish activity as new investors looked for avenues to make money quickly. Turnover in equity futures and options has been doubling every year since 2020-21. With domestic funds chasing stocks, India became one of the most expensive equity markets globally. While the ongoing correction has pulled the price-earnings multiple of the Nifty50 down from 24 in September 2024 to 20 now, it is still trading at a significant premium to other emerging market indices. The valuation in many pockets such as FMCG, MNCs, and consumer non-durables sectors continue at exorbitant levels.
With the Indian stock market still trading at lofty valuations, the correction could continue until prices align with fundamentals. New investors should heed the perils of chasing high-risk stocks. The stock market regulator, stock exchanges and other intermediaries should increase investor awareness outreach over the coming months, educating them about the way stock markets evolve, and the wisdom in long-term investing. It would be a pity if retail investors who entered stock market after Covid move away from equity investing due to this correction. The regulator should not respond in any knee-jerk fashion, by increasing trading margins, collateral requirements or surveillance. It is best to let this correction run its course.