Sensex tumbles 1,000 points: Why markets are falling despite strong growth

It's not been a great year for investors on Dalal Street, despite India's strong economic growth. So why has the market remained on a losing run for so long? We explain why GDP growth alone has not been enough to arrest the bloodbath on Dalal Street.

In Short

• Sensex fell over 1,000 points; Nifty below 22,900 amid global tensions
• Crude oil above $107 and US bond yields at 5.2% pressure equities
• Market recovery depends on easing crude prices and US yield decline

The economy remains resilient, but investors on Dalal Street continue to feel the painful pinch of growing geopolitical tensions and elevated crude oil prices. To make matters worse, foreign portfolio investors (FPIs) have once again started pulling money out of Indian equities.

The pressure came to a head on Monday, when the Sensex fell more than 1,000 points and the Nifty slipped below 22,900 as Dalal Street was engulfed by a sea of red.

Monday's sell-off did not come out of nowhere. Markets had already been under pressure for weeks, with the benchmark indices extending a losing streak that has now stretched to seven consecutive weeks.

The Sensex has fallen nearly 15% so far this year, while the Nifty is down around 13%. The damage has also spread beyond the headline indices.

As many as 18 of the 50 Nifty stocks are now trading more than 20% below their respective 52-week highs, with combined market capitalisation erosion in these stocks of around Rs 31.35 lakh crore.

So, why are Indian stocks falling when the economy continues to grow at a healthy pace?

India's GDP grew 7.8% in the April-June quarter of FY27, beating economists' expectations as well as the RBI's 7% projection. Growth was supported by private investment, consumption and manufacturing.

Yet the stock market has been moving in the opposite direction.

As Dr V K Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, puts it, "Two apparently contradictory trends - in the economy and markets - deserve attention. The economy is resilient and corporate earnings are improving, but the market is steadily going down. This is a case of external headwinds overpowering domestic tailwinds."

That, in many ways, explains what is happening on Dalal Street.

ECONOMY STRONG. SO WHY ARE STOCKS FALLING?

A strong GDP number does not automatically translate into a rising stock market.

Stocks are priced on expectations of future earnings, interest rates, liquidity and the return investors can earn elsewhere. And right now, several of those variables are moving against Indian equities.

The biggest concern right now is crude oil. Brent crude has climbed above $107 a barrel amid uncertainty over the US-Iran conflict and concerns around the Strait of Hormuz.

India imports around 85% of its crude oil requirements. Higher crude prices mean a bigger import bill, greater pressure on the rupee and a potential rise in inflation. If elevated oil prices persist, they could also squeeze corporate margins and complicate the interest-rate outlook.

Vijayakumar points to exactly this problem.

"Brent crude at $106 and the US 10-year yield at 5.2% are strong headwinds that are weighing on markets," he said.

The other part of that equation is US bond yields.

The US 10-year Treasury yield has moved above 5%, tightening global financial conditions and making dollar-denominated assets relatively more attractive. Elevated yields can reduce the relative appeal of emerging-market equities such as India.

And this matters because Indian equities are not being judged in isolation. When investors can earn relatively higher returns from US assets, emerging markets have to compete harder for global capital.

FOREIGN INVESTORS ARE EXITING AGAIN

And this is another factor that has hit Dalal Street hard.

FPIs, after turning buyers in July and August, have once again become sellers in September. They have withdrawn Rs 17,131 crore from Indian equities in September so far, according to depository data.

But there is an interesting twist.

Foreign investors have simultaneously put Rs 8,551 crore into the primary market during the month.

So, it is not that foreign investors are abandoning India altogether. They are, however, reducing exposure to listed equities through the secondary market while continuing to participate selectively in new issues.

Vijayakumar believes the renewed selling will keep the market under pressure.

"FPIs, after turning buyers in July and August, have again turned sellers in September. This scenario will keep the market under pressure in the near-term," he noted.

While FPIs have been selling large-cap stocks, Vijayakumar noted that they continue to buy mid- and small-caps despite elevated valuations.

"From the market perspective an important trend is that even though FPIs are sellers in large-caps, they continue to buy mid-and small-caps despite their elevated valuations. The broader market is where the momentum is. This is likely to be a short-term phase," he said.

That raises an obvious question: how long can this divergence continue?

The answer could matter considerably for retail investors.

Vijayakumar believes the valuation gap between large-caps and mid- and small-caps cannot persist indefinitely.

"The valuation differential between large-caps on one side and mid- and small-caps on the other, will not last long. A reversion to mean is inevitable. This will happen only when crude and US bond yields cool."

In other words, the market may eventually need a change in the global environment before the large-cap segment can regain momentum.

STRONG GROWTH IS NOT ENOUGH

This is perhaps the most important takeaway from the current market correction.

India's growth numbers are not the immediate problem.

The economy expanded 7.8% in the first quarter of FY27, with private investment rising nearly 12% year-on-year and consumption growing 7.1%. Manufacturing grew 9.2%, while financial services expanded 12.1%.

There are other signs of domestic resilience, too. India's infrastructure output rose 4.8% year-on-year in August, with cement production up 12.5% and electricity generation rising 11.6%.

But equity markets are dealing with a different set of variables.

Oil is expensive. US bond yields are high. Geopolitical risks have increased. The rupee remains under pressure. And foreign investors have returned to selling.

So, the apparent contradiction between the economy and the stock market may not really be a contradiction at all.

The domestic economy can remain strong while equity valuations come under pressure because the price investors are willing to pay for those earnings depends heavily on global interest rates, liquidity and risk.

That is the key distinction investors need to understand.

GDP tells us how the economy is performing. The stock market, meanwhile, is also asking what those earnings will be worth in a world where oil is above $100, US bond yields are elevated and geopolitical risks remain high.

WHAT SHOULD INVESTORS WATCH?

For now, the market's direction will depend heavily on what happens to crude oil and US bond yields.

If geopolitical tensions ease and crude prices retreat, some of the pressure on Indian equities could ease. A decline in US Treasury yields could also improve global risk appetite.

But if oil remains around $105-107 or moves higher, while US yields stay near 5.2%, the pressure could persist.

Experts have identified 23,000 as an immediate support level for the Nifty, with 22,600-22,580 as the next important zone if that level breaks.

For investors, however, the bigger question is not where the Sensex or Nifty will be tomorrow. It is whether the external pressures weighing on Indian equities begin to ease.

The current correction is not a reflection of a sudden deterioration in India's economic fundamentals. It is a reminder that domestic growth is only one part of the equation for equity markets.

For now, Dalal Street remains caught between strong domestic growth and increasingly difficult global conditions.

And until those global headwinds ease, India's strong economic numbers may not be enough to lift stocks.

- Ends