The Stock Market’s Cracking—And It’s Not Pretty. FIIs Exodus But Analysts Sight Long Term Potential Despite Rs 32,00,000 Core Investor Wealth Gone In 2025. What Is The Bear-ish Deal Here?

The stock market is taking a beating, and it’s starting to show. This week’s broader selloff wiped out a staggering ₹9 lakh crore from the BSE market cap, dragging investor wealth down by ₹32 lakh crore in January alone. The worst hit? Small and midcap stocks, with benchmark SMID indices tumbling up to 4% today and a brutal 11-14% so far this month.

So what’s driving this carnage?

A mix of heavy foreign outflows—₹64,156 crore pulled out in January—thanks to a rising dollar under Trump 2.0 and India’s steep valuations. Add to that the lack of enthusiasm for the upcoming Union Budget 2025 and no hope of Fed rate cuts, and investors are understandably on edge. Weak corporate earnings are just adding fuel to the fire.

The Reality 

Indian equities have been in a downward spiral since September, with foreign investors pulling out over concerns about economic slowdown. Yet, analysts are calling this a “healthy correction,” but for investors watching their portfolios shrink, it sure doesn’t feel that way.

The Nifty 50 and Sensex are now hovering at seven-month lows, officially in correction territory since their September highs. Sectors like real estate, energy, and autos have taken the biggest hits, according to Goldman Sachs.

It’s a sharp U-turn from last year, when the Nifty 50 was smashing record highs and outperforming the S&P 500 for most of the year. But the warning signs were always there.

According to Venugopal Garre, head of India research at AB Bernstein, the bubble was long building however the acknowledgement is a recent phenomenon. He points to sluggish earnings and weak economic growth in India’s second fiscal quarter as the key reasons for the current slump.

What is biting the bullet even further is that foreign investors, who were already on the sidelines, are now outright sellers. What we are seeing now is a rotation out of India and emerging markets into U.S. equities. With U.S. Treasury yields rising, FPIs (foreign portfolio investors) are pulling their money out at record levels, choosing safer bets in the U.S. over India’s perceived risks.

Profit Booking and the Domino Effect

Another big reason for the slide is profit booking. After a long bull run, foreign institutional investors (FIIs) are cashing out.

According to Nilesh Shah, MD of Kotak Mahindra Asset Management, it is but natural that when a market does so well for such a long time, there’s a lot of profit in the portfolio and the result, more stocks flooding the market, pushing prices lower, and leading to even more corrections.

Hence, some foreign investors who’ve made big gains in India are now tempted to lock in those profits, especially with valuations looking stretched, setting the notion – why take the risk with India when you can get a safer return in U.S. equities?

The ‘Retail Army’ Holding the Fort

However, while foreign investors are running for the exits, India’s domestic investors are charging in, keeping the market from falling off a cliff. Since October, local investors have pumped in a solid $27 billion into Indian equities, according to Manulife data.

As Praveen Jagwani, CEO of UTI International puts it, the surge in retail investing—fueled by a fourfold increase in domestic equity investors between 2020 and 2024—has created a mini-bubble that’s been slowly deflating since September. He further states that the flood of millions of retail investors into stocks with shaky fundamentals pushed valuations way up. A healthy pullback is necessary for sustainable growth.

So is it just a ‘healthy’ correction or is there more to it?

Despite the recent slump, some market veterans are keeping their cool.

Pramod Gubbi, co-founder of Marcellus Investment Managers notes that after four years of strong post-COVID returns, Indian markets are going through a natural cycle of consolidation. Hence, according to him, this is just a healthy correction.

Gubbi believes that if valuations cool down, it could attract a fresh wave of investors who had been staying away due to overpriced stocks.

Jagwani agrees, saying the rapid rise of Indian markets in 2023 and 2024 was a bit too much, too fast, adding that this correction is simply a return to more reasonable levels.

For context, the Nifty 50 delivered nearly 9% returns in 2024 and a whopping 19% in 2023—numbers that were bound to settle at some point.

Long Term Investors Aren’t Worried

While the short-term outlook may seem rough, not everyone is hitting the panic button. Abrdn’s James Thom sees “great opportunities” in the long run, particularly in India’s IT and private banking sectors.

So, while the market’s cooling off now, those playing the long game still have plenty to be optimistic about.

Let us weigh in top 5 factors that may dictate the Indian stock market in February.

Factors That May Hit Indian Stock Markets 

Undoubtedly, the Indian stock market has started 2025 on a weak note, with both the Sensex and Nifty 50 tumbling over 3% in January.

The decline, as we have seen has been fueled by a mix of factors, including disappointing corporate earnings, stretched valuations, and relentless foreign portfolio investment (FPI) outflows—FPIs have dumped over ₹67,000 crore worth of Indian equities this month alone.

Now as February approaches, investors will be closely watching key developments that could dictate market movements.

1) US Federal Reserve’s Interest Rate Decision

The US Federal Reserve is set to announce its first monetary policy decision of 2025 on January 29, following a two-day Federal Open Market Committee (FOMC) meeting. This will also be the first Fed policy announcement after Donald Trump returned to the White House, making it particularly significant.

While the Fed is expected to keep interest rates unchanged, the bigger question is how it will see Trump’s early economic policies.

If the Fed signals a rate cut later in the year, it could spark renewed foreign inflows into emerging markets, including India. However, if the Fed maintains a hawkish stance, it could strengthen the US dollar, making Indian equities less attractive for foreign investors and triggering further outflows.

Market watchers will be analyzing Fed Chair Jerome Powell’s tone—whether he hints at rate cuts in the coming months or sticks to a “higher for longer” vision will have a major impact on global risk sentiment.

2) Union Budget 2025

The biggest domestic event of the month will be the Union Budget 2025-26, which Finance Minister Nirmala Sitharaman will present on February 1. The Budget will set the tone for the government’s economic priorities in a year filled with global uncertainties.

Key aspects to watch –

• Fiscal Deficit Target: The government is expected to keep the fiscal deficit around 4.5% of GDP, signaling fiscal prudence. Any deviation from this could spook markets.

• Infrastructure & Capex Push: Investors will look for a continued focus on infrastructure spending, which has been a key growth driver.

• Taxation & Reforms: Any changes in direct or indirect taxes, particularly capital gains tax on equities, could impact investor sentiment.

• Sectoral Boosts: Incentives for manufacturing, real estate, or consumption-linked sectors could drive sector-specific rallies.

Therefore, if the Budget is growth-oriented while maintaining fiscal discipline, it could provide much-needed support to the stock market. However, if it fails to address investor concerns, market sentiment could remain weak.

3) RBI’s First Policy Under the New Governor

The Reserve Bank of India (RBI) will hold its first monetary policy meeting under new Governor Sanjay Malhotra from February 5 to 7; the central bank’s stance on interest rates and liquidity will be closely watched.

It should be noted that in a major liquidity infusion move, the RBI recently announced plans to inject ₹1.5 lakh crore into the banking system through a mix of forex and money market measures, including –

• Government securities purchases worth ₹60,000 crore through open market operations (OMOs).
• A ₹50,000 crore variable rate repo auction on February 7.
• A $5 billion rupee-dollar swap auction on January 31.

However, economists are divided on whether the RBI will cut interest rates in February, but recent dollar weakness and improved banking liquidity could give the central bank more flexibility. A rate cut or a dovish policy tone could boost market sentiment, while a more cautious approach may leave equities struggling for direction.

4) The DeepSeek AI Shockwave

A surprising new factor rattling global markets is the emergence of DeepSeek AI, a low-cost Chinese artificial intelligence model that has triggered a massive sell-off in US tech stocks and semiconductor firms.

The panic surrounding DeepSeek AI’s potential impact on AI leaders like Nvidia, AMD, and ASML has led to a global tech stock rout, which has also affected Japanese and Indian technology stocks.

If this sell-off continues, it could hurt India’s IT sector, a key pillar of the Nifty 50. On the flip side, if fears subside and tech stocks stabilize, it could provide a relief rally for Indian IT majors like TCS, Infosys, and Wipro.

5)  Delhi Assembly Elections

The Delhi Assembly elections, scheduled for February 5, could also impact market sentiment, albeit indirectly. The results, to be announced on February 8, will be a crucial political test for the BJP and the Aam Aadmi Party (AAP).

A C-Voter survey suggests AAP may win with 51% of the vote, while 41% of respondents indicated they wanted a change in government. If the results go against market expectations, it could introduce some political uncertainty—especially in the lead-up to the Lok Sabha elections later in the year.

While state elections don’t usually impact markets significantly, a big political surprise could lead to volatility in sectors tied to government policies, such as infrastructure, power, and public sector enterprises.

The Last Bit 

With global and domestic headwinds shaping market movements, February is set to be a crucial month for Indian equities. While concerns around foreign outflows, earnings weakness, and global volatility persist, there are also opportunities for a rebound if key events—such as the Union Budget and RBI policy—deliver positive surprises.

As always, long-term fundamentals remain strong, but managing the near-term turbulence will require patience and a sharp focus on macro trends. For now, the stock market’s in reset mode. Whether this correction turns into something more serious depends on global factors, upcoming earnings, and investor sentiment around India’s economic outlook.