Sensex crashes 4,000 points in 5 days, Nifty sheds 5% as Fed caution weighs; key factors behind market fall

Nifty has lost nearly 5 percent in last 5 days from the recent swing high of December 13.

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26 Aug, 2025 12:21

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Indian equities extended their losing streak on Friday, with Sensex and Nifty falling nearly 5 percent in one trading week -- the biggest crash in two and a half years. NSE Nifty 50 plunged about 1,200 points, while BSE Sensex shed over 4,000 points in 5 straight sessions.

The selloff has been driven by hawkish signals from the US Federal Reserve, relentless FII selling, and concerns high valuation concerns souring investor sentiment. The NSE index has slipped below key technical support levels, while sluggish corporate earnings growth has added to the market's woes, limiting prospects for a near-term recovery.

On December 20, the NSE Nifty fell more than 400 points, before closing down 1.5 percent at 23,587 points. The BSE Sensex fell about 1,350 points intraday and ended down 1,176 points at 78,042. The Nifty has lost nearly 5 percent from the recent swing high on December 13.

Key reasons behind the market fall:

1. Fed’s hawkish stance

The US Federal Reserve announced a widely expected 25 basis points rate cut this week, but its signal of just two rate cuts next year disappointed markets globally. Fed Chair Jerome Powell also emphasised the risks of persistent inflation, revising the 2025 inflation forecast upwards.

“Even though Accenture's upbeat results initially supported tech stocks, the Fed's hawkish outlook has hurt sentiment, with FIIs continuing to pull out funds,” said Anita Gandhi, founder of Arihant Capital Markets. The US Fed’s cautious tone triggered sharp selloffs in US markets, which spilled over into Indian equities.

Also read | FIIs turn buyers in financial services, IT, realty stocks in early December

2. FIIs resume aggressive selling, turn net sellers this month

Foreign institutional investors have reversed their buying spree from earlier this month, net selling Rs 12,230 crore worth of Indian equities over the past four sessions. This persistent selling has turned them into net sellers for December month-to-date. “The strong US dollar and robust US economy are diverting funds away from emerging markets like India.

With the 10-year US yield at ~4.52 percent and sluggish earnings growth in India, FIIs currently lack compelling reasons to invest here,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services. He added that FIIs may return once the dollar stabilises, but near-term flows remain under pressure.

3. High valuations and sluggish earnings growth make investors nervous

The Nifty continues to trade at expensive valuations, with its one-year forward P/E nearing 20x, compared to the 10-year historical average of 18.97x. This, coupled with sluggish earnings growth, has left investors with little margin of safety. “When valuations are high, any trigger can take the market down,” Vijayakumar said.

Similarly, Vinit Sambre, Head of Equities at DSP Mutual Fund, said to CNBC TV18 that the market levels are very high, and that there is not much margin of safety across most sectors. Further, the upcoming Q3 FY25 earnings are likely to see marginal improvement, and that too will get absorbed in leading indicators, limiting any near-term upside, said Vijayakumar.

Also read | SEBI board meet: New laws; 9 key announcements and the one that didn't make it

4. Breach of key technical support level intensifies pressure

The Nifty slipped below its 200-day moving average (DMA) of 23,870 on Thursday, intensifying selling pressure. On Friday, the index also breached key support levels of 23,850, which opened the door for further downside toward the 23,700–23,500 range.

Market outlook: Here's what investors must do amid uncertainty

While a mild recovery could emerge ahead of the Reserve Bank of India’s February monetary policy meeting, broader sentiment remains cautious. VK Vijayakumar said that the ongoing fall has turned valuations fairer for select large-cap stocks, particularly in the banking sector, with ICICI Bank and HDFC Bank offering attractive buying opportunities.

However, he advised investors to tread cautiously. The FMCG sector, once considered defensive, remains in a high valuation territory amid a continuing consumption slowdown. Investors should wait and watch, focusing on quality names where valuations are reasonable, he said.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.