Markets in freefall: Low volumes, FII pullouts send indices crashing on Monday

On a day when trading volumes were low, the Indian markets continued their downward spiral for the fifth straight session on Monday. Benchmark indices slid more than 1% each to their respective eight-month lows, wiping out a staggering ₹4,34,579 crore in investor wealth in a day.

Total turnover on NSE—at ₹71,947.32 crore—was its lowest in nearly four months. Experts say in such situations, it takes less effort to move the market, making price swings more exaggerated.

At the same time, foreign investors also continued to pull out monies. On Monday, foreign institutional investors (FIIs) offloaded a net ₹6,286.70 crore, while domestic institutional investors (DIIs) stepped in with net purchases of ₹5,185.66 crore.

Benchmark Nifty50 ended the day at 22,553.35, down 1.06%, while the BSE Sensex settled 1.1% lower at 74,454.41. Meanwhile, the broader market also declined—Nifty Midcap 100 fell 0.9% and Nifty Smallcap 250 dropped 1.2%.

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Meanwhile, over the past three months, the Nifty50 has been the second-worst performer among emerging markets, slipping 5.6%. The only index to fare worse is Indonesia’s Jakarta Composite, which has declined 6.2%, according to Bloomberg data.

The challenges

The market downturn has created a significant gap from record highs across indices. The Nifty Smallcap 250 is trailing 22% below its all-time peak, while the Nifty Midcap is lagging by 18%. Meanwhile, the headline indices aren’t spared either—Nifty50 is down 14% and the Sensex has slipped 13% from their respective historic highs.

Experts warned of stretched valuations, poor corporate earnings due to subdued demand, and other challenges for the market as investors look for succour.

Nuvama analysts wrote in a strategy report on 17 February that hereon, demand would be critical for earnings. However, demand outlook is dull as global recovery is uncertain, household incomes are weak, credit is slowing, and corporate capex is subdued, while fiscal and monetary policies have not yet turned accommodative, they said.

“Decelerating earnings amid still-high valuations (despite correction) warrant caution,” the report read. The brokerage prefers large caps over small and midcaps, and has maintained a defensive bias, with private banks being the only key cyclical overweight.

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Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers, noted that while large caps are still relatively less expensive than small and midcaps, valuations across the board appear stretched. Given the slowdown in corporate earnings and discretionary spending, he believes the market is looking a bit pricey.

To be sure, the Nifty 50 is currently trading at a price-to-earnings (PE) ratio of 21.06, well below its five-year average of 23.91, according to Bloomberg data. The Sensex is also trailing its historical valuation, with a current PE ratio of 22.07 compared to its five-year average of 25.34.

ICICI Securities in a report dated 22 February indicated that Nifty P/E could rise on the back of Zomato and Jio Financial Services replacing Bharat Petroleum Corporation Ltd. (BPCL) and FMCG major Britannia Industries in the Nifty50 on 28 March 2025, as part of the NSE’s semi-annual index reshuffle.

BPCL and Britannia, with trailing P/E of eight times and around 57 times, respectively, will be replaced by Zomato and Jio Financials with trailing P/E of about 320 times and approximately 96 times, respectively, as per ICICI Securities’ report. “This could inflate NIFTY50 P/E by 2.5% on a trailing basis from 22.1x to 22.6x,” the report said.

According to Sumit Jain, deputy chief investment officer at ASK Investment Managers, key factors contributing to market uncertainty include global trade instability and the sluggish recovery of India Inc.’s profit growth.

He acknowledges that Indian equities may face some near-term bumps but remains bullish on the long-term outlook. Unlike other markets, he believes India has the potential to sustain growth over an extended period.

Looking ahead

Nitin Raheja, executive director at Julius Baer India, believes that a rebound in corporate earnings will be the key to restoring investor confidence and reversing the current downtrend. Raheja also believes large-cap stocks offer a safer investment bet now, as mid- and small-cap companies may face further challenges ahead.

At a time when the headline indices have taken a hit, the broader market did not see a relatively steeper fall today, noted Anirudh Garg, partner and fund manager at Invasset PMS. This, he believes, is “a sign that investors are already dipping their toes back into small and midcap stocks”.

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Meanwhile, Neelesh Surana, CIO, Mirae Asset Investment Managers (India) said, “We expect GDP growth, earnings, and markets to stabilize over the next few quarters, as significant actions have been taken on both the fiscal and monetary fronts”. He feels GDP normalization will be driven by higher execution of government capex, better agri-output, and stability in consumption driven by tax cut as well as ongoing reductions in interest rates.

Some stability in earnings along with reasonable valuations, could help arrest FII selling, which has been primarily driven by the changing macros in the US due to the new regime.

Jain of ASK likes sectors related to discretionary spending and manufacturing as he sees strong opportunities in these industries.