$320 Billion Wiped Out! 8 Reasons Why Indian Stock Markets Are Bleeding

Author - Aditya Rawat, MBA, Coventry University, UK (Ex. Deloitte, MOODY's Research, and HCL-British Telecom)

Note: The views shared in this blog are based solely on my personal experiences and research. Others may have different perspectives and findings.

The Indian stock market, once celebrated as a symbol of economic growth and investor optimism, is going through one of its worst phases. According to data from Capitalmarket, the market has witnessed a dramatic downturn over the past six months, erasing approximately INR 28 lakh crore (USD 321.3 billion) in market capitalization. This staggering loss has left millions of investors, from seasoned professionals to first-time participants, reeling from the impact. The decline, which began in late 2024, has been marked by a series of consecutive losses, with the benchmark Nifty 50 index experiencing its longest losing streak in 29 years. This unprecedented crash has not only shaken investor confidence but also raised questions about the underlying causes of the market's sudden reversal.

The downturn has been particularly painful for India's growing base of retail investors, many of whom entered the market during its bull run. Over the past few years, the Indian stock market had become a magnet for middle-class households seeking higher returns on their savings. According to data from the National Stock Exchange (NSE), the proportion of Indian households investing in the stock market surged from one in 14 six years ago to one in five by 2024. This surge was fueled by the proliferation of low-cost brokerage platforms, government-driven financial inclusion initiatives, and the rise of social media influencers promoting stock market investments. However, the recent crash has exposed the vulnerabilities of this new wave of investors, many of whom entered the market with limited understanding of its risks and complexities. This article delves into the seven primary reasons behind the Indian stock market's downturn, supported by data, research, and expert insights, to provide a comprehensive understanding of the forces driving this unprecedented crash.

1. High Taxation

Countries worldwide are slashing corporate taxes to attract businesses. The U.S. cut its rate from 35% to 21% in 2017, while low-tax hubs like Dubai with 9% corporate tax and Ireland with 12.5% corporate tax remain investor favorites. India did reduce its corporate tax from 30% to 22% but in a world of aggressive tax competition, that’s hardly enough to stay ahead. The imposed by the Indian government has significantly impacted the stock market and reduced investor confidence and discouraged both domestic and foreign investments. Increased taxation on capital gains, dividends, or securities transactions raises the cost of investing, leading to lower participation from retail and institutional investors. This can trigger large-scale sell-offs, reducing market liquidity and driving stock prices down.

2. FIIs Shifting Investments to China

Foreign Institutional Investors (FIIs) have been a major driver of India's stock market growth over the past decade. However, since late 2024, FIIs have been steadily withdrawing their investments. Data from the National Stock Exchange (NSE) reveals that FIIs offloaded over ?1.5 lakh crore (USD16 billion) worth of Indian equities in 2025 alone with ?46,000 crore (16billion) worth of Indian equities in 2025 alone with ??46,000?crore (5.5 billion) being sold in February 2025. This massive capital outflow has created a liquidity crunch, exacerbating the market's decline. The primary reason for this exodus is the attractiveness of other global markets, particularly the US and China. Rising US bond yields, coupled with the resurgence of the Chinese economy, have lured foreign investors away from India. The US Federal Reserve's hawkish stance on interest rates has made US bonds a safer and more lucrative investment option. Meanwhile, China's economic recovery, driven by government stimulus and rate cuts, has reignited investor interest in its stock markets.

3. Weak Corporate Earnings

Corporate earnings have been a significant drag on market sentiment. The fourth quarter (Q4 FY25) earnings season has been particularly disappointing, with many companies reporting lower-than-expected profits. The banking sector, which accounts for nearly 30% of the Nifty 50 index's weight, has been a major contributor to this downturn. Analysts have flagged concerns over weak earnings from Indian banks, citing rising non-performing assets (NPAs) and sluggish credit growth. For instance, the Nifty Bank index, which tracks the performance of India's top banking stocks, has fallen by over 15% since its peak in September 2024. This decline has had a cascading effect on the broader market, as banking stocks are a key component of major indices like the Sensex and Nifty.

4. High Stock Valuations

One of the underlying causes of the market crash is the excessive valuations that Indian stocks had reached by mid-2024. The price-to-earnings (P/E) ratio of the Nifty 50 index had soared to 28x, significantly higher than its 10-year average of 20x. This overvaluation made Indian equities less attractive to both domestic and foreign investors, prompting a correction.

Market experts argue that the rally in Indian stocks over the past few years was driven more by liquidity and optimism than by fundamentals. As the global economic environment became uncertain, investors began to reassess their positions, leading to a sell-off in overvalued stocks.

5.?Geopolitical Risks and Trade Tensions

Geopolitical tensions and trade uncertainties have further dampened investor sentiment. The resurgence of the Trump administration in the US has reignited fears of trade wars and tariff hikes. President Donald Trump's protectionist policies, particularly targeting China, have created ripples across global markets, including India. Additionally, conflicts in the Middle East and the ongoing Russia-Ukraine war have added to the uncertainty. These geopolitical risks have made investors cautious, prompting them to shift their capital to safer assets like gold and US Treasuries.

6.?DIIs Unable to Counterbalance FII Outflows

Historically, Domestic Institutional Investors (DIIs) have played a crucial role in stabilizing the Indian stock market during periods of FII outflows. However, this time, DIIs have been unable to provide sufficient support. One reason for this is that DIIs are already heavily invested in the market, with their portfolios concentrated in overvalued stocks. As a result, they have been reluctant to make fresh investments until the market stabilizes.

Data from the Securities and Exchange Board of India (SEBI) shows that DII inflows have declined by over 40% in the first two months of 2025 compared to the same period in 2024. This lack of support from DIIs has exacerbated the market's decline.

7.?Rising US Bond Yields

The rise in US bond yields has significantly driven capital away from emerging markets like India. The 10-year US Treasury note yield has surged to 4.5%, its highest level in over a decade. This has made US bonds an attractive investment option for risk-averse investors, leading to a flight of capital from riskier assets like Indian equities.

The impact of rising US bond yields has been particularly pronounced in India, where foreign investors have been major participants in the stock market. As these investors reallocate their portfolios to take advantage of higher yields in the US, Indian markets have suffered.

8.?Substantial Rise in SIPs

The Indian stock market has seen a massive influx of retail investors in recent years, driven by the proliferation of low-cost brokerage platforms and the rise of social media "finfluencers." As per the data from The Business Standard, for the whole of 2024, active Systematic investment plans (SIPs) accounts rose by 26.8 million to 103 million, compared to an addition of 15.1 million accounts in 2023. The growth in account openings was driven by increased new investor participation, strong performances across asset classes, and record-breaking new fund offerings (NFOs).?

While this democratization of investing is a positive development, it has also led to a surge in speculative trading and overconfidence among retail investors. Many first-time investors, lured by the promise of quick riches, have entered the market without fully understanding the risks involved. This lack of risk awareness has made them particularly vulnerable to market downturns.

The Road Ahead: Is Recovery on the Horizon?

Despite the current turmoil, market experts believe that the Indian stock market is undergoing a necessary correction rather than a prolonged bear phase. Valuations have become more reasonable, with the Nifty 50's P/E ratio falling below its 10-year average. Additionally, foreign investor selling has eased since February 2025, suggesting that the worst may be over.

The Indian government's recent measures, including a $12 billion income-tax giveaway in the federal budget and falling interest rates, are expected to boost GDP growth and corporate earnings. However, geopolitical risks and global economic uncertainties will continue to weigh on investor sentiment.

For retail investors, the market crash serves as a stark reminder of the importance of risk management and long-term investing. As Monika Halan, a renowned financial educator, aptly puts it, "The stock market isn't a gambling den. Invest only what you can afford to lose, and always have a long-term perspective."

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