India’s equity markets, long buoyed by strong economic growth and rising corporate earnings, are now facing a sharp and prolonged correction. The Nifty 50’s nearly 13 per cent decline from its September 2024 peak ~ steeper than broader Asian and emerging markets ~ signals deeper structural concerns. Slowing corporate profits, moderating economic growth, and persistent foreign outflows are creating headwinds that investors can no longer ignore. A key trigger for the current market decline is the sharp deceleration in corporate earnings growth. After two years of double-digit expansion, Nifty 50 companies reported just 5 per cent growth in the October-December quarter ~ the third straight quarter of single-digit gains.

The reasons are evident: tepid urban demand, elevated inflation, and sluggish income growth. These factors have stifled consumption, particularly in discretionary spending sectors. This is not a short-term blip. Brokerage firms are already lowering full-year profit estimates for over half of the companies they track. Even next year’s expectations may be overly optimistic. If earnings growth continues to disappoint, valuations ~ already stretched ~ will have to correct further. Foreign institutional investors, once the backbone of India’s stock market rally, are now retreating at an alarming pace. The nearly $25 billion in net foreign outflows since late 2024 underscores a significant shift in sentiment. Rising US interest rates, concerns over potential trade restrictions, and China’s improving market performance have led to capital flight. This exodus reflects a broader trend. A recent survey found that global fund managers have cut their India allocations to a two-year low, holding a net 19 per cent underweight position. Only Thailand fared worse among Asian markets. This loss of confidence suggests that India’s perceived premium among emerging markets is eroding. Despite the selloff, Indian equities remain expensive by historical standards.

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The Nifty 50’s forward price-to earnings ratio hovers around 20 ~ its 10-year average but still among Asia’s highest. Mid- and small-cap stocks, which have plunged into bear market territory, continue to trade at inflated multiples. The disconnect between valuations and earnings growth is unsustainable. Investors accustomed to the post-pandemic bull run must recalibrate their expectations. Market returns will likely moderate, and speculative excesses in smaller stocks could face a deeper correction. The question now is how long this correction will last. Most analysts expect continued weakness at least until March 2025. However, structural factors ~ such as slowing GDP growth, persistent inflation, and global economic uncertainty ~ suggest that the pain may extend for several quarters. For long-term investors, this period presents both challenges and opportunities. While speculative bets could unravel, quality companies with strong fundamentals may emerge stronger.

The key is to adopt a selective, disciplined approach rather than chasing short-term rebounds. The Indian equity market, once a symbol of rapid economic growth, is now confronting reality. A painful but necessary recalibration is underway. Investors who recognise this shift and adjust accordingly will be best positioned for the future.