'The market's sharp decline recently has shaken the confidence of retail investors, leading to increased selling.'
January 2025 is shaping up to be the worst month on record for stock corrections, with 2,461 companies listed on the BSE seeing a drop in value, so far. This eclipses the previous high of 2,334 stocks in March 2024.
The ratio of advancing to declining stocks stands at 0.82 -- only marginally better than February 2023's 0.81.
During March 2020, at the height of the Covid-induced market crisis, this ratio hit a low of 0.72. The number of stocks correcting this month is 20 per cent higher than the two-year average of 2,043.
The broader BSE 500 index has plummeted by 6.5 per cent, setting it on course for its steepest monthly decline since March 2020, when the index tumbled by 24 per cent.
The breadth of weakness in the broader market signals a blow to retail investor sentiment. Stocks beyond the top 500 are typically driven by small investors.
"The market's sharp decline recently has shaken the confidence of retail investors, leading to increased selling," said U R Bhat, co-founder and director at Alphaniti Fintech.
"Data shows that retail investors are selling aggressively, in addition to overseas investors who have been at it for several weeks now."
The market capitalisation of all BSE-listed firms has shrunk by Rs 33 trillion ($380 billion) to Rs 409 trillion ($4.73 trillion).
In absolute terms, this month's erosion trails just behind the record Rs 33.4 trillion wiped out in March 2020.
At the heart of January's market selloff are foreign portfolio investor (FPI) outflows, which have touched Rs 71,000 crore (Rs 710 billion/$8.2 billion) -- the second-worst monthly outflows on record after October 2024's Rs 92,000 crore (Rs 920 billion/$11 billion).
Rising US bond yields and a stronger dollar have driven FPIs to pull out, while the sharp outperformance of US markets -- fuelled by optimism around corporate tax cuts under the new Trump administration -- has made investments in expensive markets like India less appealing.
Domestically, slowing earnings growth has accentuated the market decline.
"After witnessing exceptionally strong earnings growth annually since FY21, consensus expects FY25 earnings growth to moderate to 4-5 per cent. In recent years, a large part of Nifty 50 returns has been led by earnings growth, instead of multiple expansion," said Kunal Vora, head of India equity research at BNP Paribas.
Initially, blue-chip indices declined sharply from their September peak vis à vis mid- and small-cap indices, largely due to greater presence of FPIs in largecaps.
However, the tide has turned in the past two weeks, with midcap and smallcap stocks facing intensified selling.
A relatively strong performance of midcaps and smallcaps since January 2023 had further pushed valuation premiums over the Nifty 50, and despite recent losses, they still trade at expensive valuations.
"There is a high level of uncertainty relating to various policy announcements, including imminent ones, from the new US administration under Donald Trump. It will probably take some time for the market to come to grips with the new reality and feed new information to prices," said Bhat.
"Once that happens, we could see some stability return."
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