Why are the Indian stock markets crashing?

Why are the Indian stock markets crashing – Let’s dive deeper into the factors behind the Indian stock market crash as of February 28, 2025, expanding on the key drivers and adding granularity to the situation based on the latest insights and dynamics.

1. Foreign Institutional Investor (FII) Outflows: A Deeper Look

The scale of FII selling in 2025 has been staggering—over ₹1.33 lakh crore withdrawn year-to-date, with ₹46,000 crore dumped in February alone (as of February 27). This isn’t just a knee-jerk reaction but a calculated shift in global investment strategy. Here’s why:

China’s Pull:

China’s markets have rebounded sharply since late 2024, fueled by stimulus measures like interest rate cuts and infrastructure spending. The Hang Seng Index, for example, has outperformed the Nifty by a wide margin, drawing FIIs to cheaper valuations (China’s PE ratios hover around 10-12x versus India’s 22-24x for the Nifty 50).

US Dollar and Bond Yields:

The US dollar index hitting 107.35 reflects a flight to safety amid global uncertainty, while 10-year US Treasury yields have climbed toward 4.5%. This makes dollar-denominated assets more appealing than emerging market equities, especially in India where returns are now squeezed by high valuations.

Profit Booking:

After a multi-year rally (Sensex gained over 60% from 2020-2024), FIIs are cashing out at peak levels, amplifying the sell-off as stop-losses trigger and momentum reverses.

This exodus has left the market vulnerable, with the Sensex dropping 1,400 points (1.88%) and Nifty shedding 420 points (1.86%) in a single session on February 28.

2. Weak Corporate Earnings: Sectoral Breakdown

The December quarter earnings have been a wake-up call, with Nifty 50 profit growth at a measly 5% year-on-year—the slowest in five years. Digging into the details:

Banking Sector:

With a 30% weight in the Nifty, banks like HDFC Bank and ICICI Bank are under pressure. Rising non-performing assets (NPAs) due to slowing consumer spending and tighter credit conditions are eroding margins. Analysts anticipate Q4 FY25 bank earnings (due in April) to disappoint further, fueling preemptive selling.

IT and Tech:

Indian IT giants (TCS, Infosys) rely heavily on US clients, where spending is contracting amid recession fears. Nvidia’s weak guidance—despite its AI dominance—sent shockwaves through global tech, dragging down India’s Nifty IT index by 3.2%. Stocks like Persistent Systems fell 4.5% in a day.

Consumer Goods:

FMCG companies like Hindustan Unilever reported muted volume growth as rural demand lags, hit by inflation and uneven monsoon recovery. This has punctured the narrative of India’s consumption-driven growth.

High expectations from India Inc., built on years of double-digit growth, have clashed with this reality, triggering a valuation reset.
3. Global Economic and Trade Concerns: Trump’s Tariff Shock

US President Donald Trump’s tariff threats—25% on Canada and Mexico, 10% on China—announced in early 2025 have rattled global markets. For India:

Export Hit: India’s $160 billion annual exports to the US (pharma, textiles, auto parts) face indirect pressure as global supply chains reorient. A stronger dollar (rupee at 87.29) makes Indian goods costlier, while trade war fallout could shrink demand.

Commodity Volatility:

Metals (e.g., Tata Steel, down 5%) and energy stocks are reeling as Trump’s policies threaten to disrupt global commodity flows. Copper and aluminum prices have spiked, squeezing manufacturers.

US Slowdown:

US consumer confidence dropping to a 15-month low signals weaker demand for Indian IT services and manufactured goods. Asian markets, including Japan’s Nikkei (down 2%) and Korea’s Kospi (down 1.8%), mirrored India’s crash, reflecting a synchronized sell-off.

4. Domestic Economic Slowdown: Numbers and Nuances

Moody’s Analytics downgrading India’s 2025 GDP growth to 6.4% from 6.6% underscores a cooling economy. Key indicators:

Manufacturing PMI:

Slipped to 56.5 in January 2025 from 58.1 in Q4 2024, reflecting export weakness and rising input costs.

Rupee Pressure:

At 87.29, the rupee’s fall has spiked oil import costs (India imports 85% of its crude), stoking inflation fears. The RBI’s likely intervention to defend the currency could tighten liquidity, hitting equity markets further.

Retail Frenzy Unwinding:

Over 2 crore new demat accounts opened in 2024 fueled a speculative bubble, with mid- and small-cap stocks soaring 50-100%. This leverage is now deleveraging fast, with the Nifty Midcap 100 down 3% on February 28 alone.

5. Market-Specific Factors: Technical Triggers

MSCI Rebalancing:

The quarterly MSCI Emerging Markets Index rejig, effective post-February 28, saw $1.5 billion in passive fund outflows from India as weights shifted. This amplified intraday volatility, with trading volumes spiking 20% above the monthly average.

DII Hesitation:

Domestic institutions, holding ₹50 lakh crore in equities, have slowed purchases after absorbing ₹1.5 lakh crore of FII sales in 2025. Their caution stems from overstretched portfolios and uncertainty over GDP data due March 1.

Derivatives Rollover:

February’s F&O expiry saw heavier-than-usual rollovers into March contracts, with bearish bets dominating as the Nifty Put-Call Ratio hit 1.2—a sign of pessimism.

6. Sectoral Pressures: Broader Impact

Beyond IT and banking, the crash has exposed vulnerabilities:

Auto: Tata Motors and Maruti Suzuki fell 4-5% as US tariffs threaten export plans and rising steel costs bite.

Telecom: Bharti Airtel and Reliance Jio saw profit-taking after a tariff hike-led rally fizzled amid slowing subscriber growth.

Realty: A 3.5% drop in the Nifty Realty index reflects fears of higher borrowing costs as RBI rate cuts get delayed by inflation pressures.

Broader Context and Outlook

This crash—Sensex down 11% from its December 2024 peak of 82,000—marks India’s worst monthly performance since the 2020 COVID plunge. Analysts are split:

Bearish View:

Some see a deeper correction to 70,000 (Sensex) if FII selling persists and GDP data disappoints. High PE ratios (22x forward earnings) still exceed historical averages (18x), suggesting more pain ahead.

Bullish Case:

Optimists argue this is a “healthy purge” of froth, with India’s 6%+ GDP growth, demographic edge, and $4 trillion market cap still a long-term draw. DII firepower and potential RBI rate cuts in mid-2025 could stabilize markets.

For now, February 28’s bloodbath reflects a perfect storm: global headwinds, domestic fatigue, and a technical unwind. Investors are eyeing Q4 GDP figures (due tomorrow) and FII moves in March to gauge if this is a blip or the start of a bear phase.

How to bring up the Indian stock markets?

1. Stop FII Outflows
   • Cut equity taxes (e.g., LTCG, STT).
   • Stabilize the rupee (RBI intervention).
   • Offer export incentives to counter US tariffs.
2. Boost Domestic Investors
   • Encourage DIIs (e.g., mutual funds, pension funds) to buy.
   • Expand retail SIPs with tax breaks.
   • Support SMEs to lift mid- and small-cap stocks.
3. Fix Corporate Earnings
   • Inject ₹2-3 lakh crore into banks and IT.
   • Subsidize input costs (e.g., oil, steel).
   • Speed up ₹10 lakh crore infra spending.
4. Counter Global Risks
   • Pivot exports to ASEAN/EU amid trade wars.
   • Promote GIFT City for diaspora funds.
5. Quick Fixes
   • Ease MSCI rebalancing impact.
   • Tighten derivatives rules.
   • Signal RBI rate cut (25 bps).

• Preview tax cuts and capex in March Budget.
• RBI to defend rupee by mid-March.
• ₹50,000 crore relief for banks/IT in 2 weeks.

• Short-term: Sensex to 75,000, Nifty to 22,500 in 2-3 months.
• Long-term: Sensex past 80,000 by December 2025 with reforms.