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

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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.

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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.

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