Nifty50 Enters Correction Territory: What Are the Key Factors Triggering Bear Market Fears

The NSE Nifty 50 index slipped into correction territory marking its first consecutive losses on Wednesday. It fell over 10 per cent from the all-time high of 26,288 touched on September 27.

The benchmark index reached an intra-day low of 23,509.60 before closing at 23,559.05, down by 324.40 points or 1.36 per cent. Similarly, the BSE Sensex also faced significant pressure, plunging by over 1,100 points to 77,533.3 at its lowest point, before settling at 77,690.95, a loss of 984.23 points or 1.25 per cent.

Mid-cap and small-cap stocks faced even sharper declines than the Nifty50, reflecting the broader market weakness. The Nifty Midcap 100 index fell 2.23 per cent on Wednesday, hitting a low of 54,024. Over the past five sessions, including today, the index has tanked by 5.5 per cent, resulting in an 11.32 per cent decline from its record high of 60,925, reached in late September.

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The Nifty Smallcap 100 index fell 2.53 per cent to hit the day's low of 17,535. Over the last five days, the index has declined by 7.18 per cent, and it has now lost 10.71 per cent from its all-time high of 19,640, touched on September 6.

The recent sell-off has been driven by a combination of domestic and global factors, ranging from weak earnings reports and rising inflation in India to broader global economic concerns.

Vinod Nair, head of research at Geojit Financial Services attributed the recent decline to relentless selling by FIIs amid weak corporate and a sharp surge in domestic inflation to a 14-month high have impacted investor sentiment, dashing hopes for a near-term rate cut by the RBI.

The correction also reflects the growing caution among investors amid expensive valuations and macroeconomic concerns, with Nifty and Sensex falling to their respective five-month lows.

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Weak Inflation Data

India's retail inflation jumped to 6.21 per cent in October 2024, its highest in 14 months, driven largely by increasing food prices. This surge has pushed inflation above the Reserve Bank of India’s (RBI) upper tolerance level, raising concerns about the central bank's future monetary policy. Many investors had been hoping for a near-term rate cut by the RBI, but this high inflation data dashes those hopes, adding to the negative sentiment.

Muted Q2 Earnings and FII Sell-Off

The Q2 earnings season has also weighed heavily on the market sentiment. The aggregate revenue of 372 companies from the Nifty 500 index recorded single-digit growth of 8.2 per cent, while profit after tax remained flat, according to Outlook Business analysis. On a sequential basis, the aggregate revenue grew 0.64 per cent and PAT fell 6 per cent.

This, combined with the ongoing sell-off by Foreign Institutional Investors (FIIs), has further dampened market sentiment. In the last month and a half, FIIs have pulled out a record Rs 1.2 lakh crore from Indian equities.

Santosh Meena, head of research at Swastika Investmart says weaker-than-expected Q2 earnings from Indian companies, particularly in the consumption sector, have further intensified FII selling, leading to record outflows from Indian equities over the past month and a half.

Global Economic Concerns

Globally, rising US bond yields and a strengthening US Dollar have put emerging markets, including India, under pressure. The stronger dollar makes US assets more attractive, diverting investor capital away from riskier markets like India. Additionally, concerns over global inflation and interest rate hikes by the US Federal Reserve have contributed to the sell-off.

“Mid and small-cap stocks were the worst hit, while the Financials and Auto sectors also showed significant weakness. This trend is mirrored across all emerging markets, as markets are jittery about future US policy actions, including trade-related implications for the world economy, which is reflected in the strengthening US dollar and rising yields," Nair says.

Deepak Jasani, head of retail research at HDFC Securities says, traders were upset over the impact of Donald Trump’s presidency on the Chinese and global economies, with fears that his policies could also reignite inflation globally and/or result in stagflation.

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Disappointing Stimulus from China

China’s recent stimulus package aimed at boosting its economy has fallen short of market expectations, leading to a sell-off in global commodity markets. Falling metal prices, in particular, have hurt the metal and auto sectors in India, leading to significant losses in those stocks. With global demand expectations now subdued, markets are jittery about the economic recovery, further fueling the correction in equity markets.

“On Wednesday, Global mining stocks suffered as metal prices slumped, driven by a robust US dollar and disappointment over China's recent stimulus measures,” Jasani says.

While the broader market outlook remains cautious, particularly for mid-cap and small-cap stocks, which may continue to face downside risks, selective stock picking in large-cap stocks and sectors with strong fundamentals could provide some opportunities for investors looking to navigate the current correction, according to analysts.

Ajit Mishra, SVP- Research at Religare Broking says Nifty has now corrected more than 10 per cent from its record high, reaching its major moving average support. Notably, alongside the benchmark index, banking index, midcap and smallcap indices also retested their long-term support levels at the 200 DEMA today.

“This confluence of support and oversold conditions might trigger a rebound, although any recovery could be limited to select stocks. Traders are advised to monitor positions closely and maintain a hedged strategy,” he added.