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

Indian markets came under heavy selling pressure, with the Sensex falling 1,000 points despite strong economic growth. So, what is weighing on investor sentiment?

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 combined developments continued to take a toll on investors 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.

It’s important to note that today’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 tumbled nearly 15% so far this year, while the Nifty has tanked 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 on Dalal Street 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.

Hariselvan Radhakrishnan, Founder and CEO of HST Wealth, was quoted in a PTI report, highlighting two factors that could negatively impact the stock market. "Brent Crude near USD 105-106 a barrel remains too elevated to provide meaningful macroeconomic relief," he said. He added that the US 10-year Treasury yield, currently near 5.2%, would remain "another important constraint on global risk appetite."

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’s 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 NOT ENOUGH TO SUPPORT MARKETS

This is perhaps the most important takeaway from the current market correction. India's growth numbers are not enough to send stocks soaring on Dalal Street.

And it is important to note that 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 DO?

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 $105-106 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.

That is why taking calculated decisions will be important for retail investors rather than reacting to every sharp move in the Sensex.

While 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.

- Ends