The Tipping Point: Recovery or More Pain?

The Indian stock market has been caught in a downward spiral, with the Nifty 50 delivering negative returns for five straight months. The last time we saw such a stretch of losses was between July and November 1996. Before that, the longest losing streak in history was eight months, from September 1994 to April 1995.

We don’t know if this current slide will match or even surpass that record. But what we do know is that markets move in cycles. And while a recovery can’t be predicted with certainty, the deeper the decline, the closer we often get to a turning point. The question now is: are we there yet?

The Market’s Performance

The past six months have been rough, with large caps struggling and smaller stocks getting hammered. Small and mid-cap stocks, typically the hardest hit in downturns, have fallen 22.85 percent and 18.99 percent, respectively. Even traditionally defensive strategies haven’t provided much shelter.

Sentiment and Macroeconomic Pressures

Beyond market trends, broader economic conditions have played a role in shaping investor behavior.

The Indian rupee has weakened by 4.06 percent against the U.S. dollar over the last six months, making imports costlier and increasing financial stress for companies with foreign liabilities. Foreign investors have also been pulling money out of Indian markets, reflecting a cautious stance amid shifting global dynamics.

On the geopolitical front, uncertainty remains. With Donald Trump back in the White House, global markets are adjusting to his policies. Meanwhile, unresolved geopolitical conflicts and domestic fiscal concerns continue to cloud sentiment.

Government Spending and Liquidity Support

Despite these challenges, there are signs of resilience. The government has stepped up its infrastructure push, with a record Rs 11.21 lakh crore, allocated for FY 2025-26 around 3.1 percent of GDP. Investments in roads, railways, and urban development are aimed at boosting economic momentum, though the effects may take time to materialize.

The Reserve Bank of India has also taken measures to ease financial conditions. In December 2024, the RBI cut the Cash Reserve Ratio by 50 basis points, reducing it to 4% and injecting approximately ?1.16 lakh crore into the banking system. Additionally, in February 2025, the RBI conducted a $10 billion foreign exchange swap auction, expected to infuse around ?87,000 crore in rupee liquidity. These steps aim to support businesses and markets by ensuring adequate liquidity in the financial system.

Defensive Strategies Have Struggled Too

One of the more unusual aspects of this downturn has been the poor performance of low-volatility stocks. Typically, these stocks hold up better during market declines, offering a cushion when broader indices take a hit. But this time, they haven’t played their usual role.

Historically, when the Nifty 200 falls more than 10 percent, low-volatility strategies have provided some level of downside protection. Yet, since 2012, there have been only a handful of instances where the broader market declined sharply and low-vol strategies failed to deliver. The most notable case before now was in the last quarter of 2024, when the Nifty 200 plunged and the Nifty Alpha Low Volatility 30 Index fell even more.

The reason? The selloff this time did not start in small caps, as is often the case in corrections, but in large caps—the very segment that is considered a safe haven. Foreign institutional investors offloaded large-cap stocks first, creating an unusual dynamic where the safest assets were hit before the riskier segments. This shock then trickled down to mid- and small-cap stocks in January 2025, intensifying the correction.

Because low-volatility stocks are primarily large caps, this initial wave of selling weakened their ability to cushion the downturn. Only after mid and small-caps took a hit in early 2025 did the low-vol strategy start showing signs of stability again.

What Comes Next?

Markets move in cycles, but they also function as an adaptive system, shaped by investors responding to each other’s expectations.

At this point, every participant. whether retail investors, institutions, or trader is making a calculation. Some see an opportunity to buy, believing that valuations are attractive. Others hesitate, worried about further downside. The market’s next move depends on which side of this equation gains dominance.

If enough investors believe the worst is over, their collective action can tip the balance and create a self-reinforcing rebound. But if fear lingers and investors remain on the sidelines, markets could drift lower, testing new levels of support.

This is the essence of equilibrium in markets. Not a single fixed point, but a shifting balance between risk appetite and caution.

Have We Seen the Bottom?

Nobody can say for sure.

Could the Nifty 50 break its record losing streak of eight months? It’s possible. But extended declines don’t last forever.

Corrections, even deep ones, eventually give way to recoveries. Whether this downturn ends in March, April, or later, it will end. And when it does, it will likely happen when few expect it.

Disclaimer

This article is for informational purposes only and reflects my personal views based on available data and market observations. It should not be considered financial or investment advice.

Sources

Data used in this article is sourced from Moneycontrol, the Nifty website, and RBI circulars.