The financial markets have experienced heightened volatility over recent months.
As of February 7, 2025, Nifty has fallen nearly 10 percent from its previous peak of 26,216. The correction has been more pronounced in Nifty Next 50, which is down 18 percent while broader markets (Midcap 150 index) have fallen around 12 percent from their respective highs as of Friday closing.
Periodic corrections are a natural part of market cycles, yet this phase has been particularly challenging. A confluence of factors – slowing domestic earnings growth, expensive valuations, high US bond yields with diminishing hopes of rate cuts, and continuing geopolitical tensions – has created a perfect storm for market participants.
While unsettling, such corrections are intrinsic to investment cycles. To navigate the current uncertainty, it is vital to maintain perspective and understand the broader market dynamics.
Understanding the current context
Slowing earnings growth
The recent Q2FY25 earnings announcements triggered a wave of downward revisions, as many companies fell short of expectations. Concerns about near-term recovery have led to Nifty earnings growth estimates for FY24-25 being revised below 5 percent.
Foreign Institutional Investors (FIIs) have been reallocating funds towards China following its stimulus announcements. This trend gained momentum post the US elections, with the Donald Trump administration's anticipated policies favouring domestic growth and tariff adjustments, further driving market actions.
Strengthening dollar
The USD-INR exchange rate rose by around 4 percent over the last three months, with the US Dollar Index (DXY) gaining 3 percent. The new US administration’s focus on economic growth and trade deficit reduction has fuelled expectations of further USD strengthening, adding depreciation pressure on the INR.
Historical perspective on market drawdowns
Benjamin Graham once said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” Market corrections bring focus to negatives, just as rallies highlight positives. However, history shows that markets have consistently rebounded from setbacks.
The following analysis of Nifty and Nifty Midcap 150 highlights drawdowns and subsequent one-year returns:
| Year | Nifty | Nifty Midcap 150 | ||
| Maximum drawdown in the year | Return for the next 1 year | Maximum drawdown in the year | Return for the next 1 year | |
| 2024 | -10.9% | NA | -11.0% | NA |
| 2023 | -7.1% | 30.4% | -7.7% | 60.6% |
| 2022 | -16.5% | 22.2% | -20.6% | 38.4% |
| 2021 | -10.1% | 10.7% | -10.5% | 10.6% |
| 2020 | -38.4% | 94.7% | -38.7% | 115.8% |
| 2019 | -11.4% | 7.6% | -14.8% | 15.1% |
| 2018 | -14.6% | 15.5% | -24.0% | 2.5% |
| 2017 | -4.1% | 12.8% | -6.8% | 14.8% |
| 2016 | -12.5% | 28.2% | -17.1% | 42.7% |
| 2015 | -16.0% | 18.0% | -12.1% | 26.1% |
| 2014 | -6.5% | -2.3% | -8.0% | 80.7% |
| 2013 | -14.6% | 50.5% | -25.2% | 76.7% |
| 2012 | -13.8% | 23.4% | -12.4% | 17.9% |
| 2011 | -26.2% | 30.2% | -33.3% | 45.2% |
| 2010 | -10.7% | 17.1% | -16.3% | -20.9% |
| Median | -12.5% | 20.1% | -14.8% | 32.2% |
Correction phase dynamics
Historically, mid- and small-cap stocks exhibit greater sensitivity during corrections, as seen in the current phase, where Nifty Next 50 stocks experienced steeper declines compared to large-cap indices.
Recovery patterns
Recovery phases often favour mid- and small-cap stocks. Post the 2020 crash, for example, while the Nifty doubled from its pre-Covid peak, the mid-cap index tripled, demonstrating its resilience during rebounds.
Sector rotation
Market cycles often drive sectoral leadership changes. The current correction has seen technology and healthcare exhibit resilience, whereas sectors like PSUs and metals, previous winners, faced significant pullbacks.
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Reasons for optimism
Strong domestic flows
Monthly SIP inflows consistently exceeding Rs 26,000 crore reflect a structural shift towards financial savings in India. This domestic liquidity provides stability during volatile periods, underscoring the maturing nature of Indian markets.
Long-term growth drivers intact
India’s favourable demographics, increasing formalisation, and rapid digital adoption continue to underpin its long-term growth story. The current correction offers attractive entry points for long-term investors.
Investment strategy going forward
Systematic deployment
Instead of attempting to time the market bottom, investors should consider staggered investments over 4-6 months to average out costs and minimise timing risks.
Portfolio rebalancing
Corrections present an opportunity to review asset allocation to ensure alignment with risk tolerance, increase exposure to large-caps for stability and explore hybrid strategies for navigating volatility effectively.
Focus on quality
During uncertain times, prioritise companies with strong balance sheets and cash flows, market leadership and proven ability to navigate business cycles.
The road ahead
Near-term outlook
Volatility may persist as markets digest global policy changes and slowing earnings. However, historically, such phases have been favourable for long-term accumulation.
Long-term perspective
India’s structural growth drivers remain robust, ensuring markets continue to deliver over the long term despite short-term challenges.
The power of patience
As Warren Buffett said, “The stock market is designed to transfer money from the active to the patient.” Investors who remain disciplined and invested through cycles are consistently rewarded.
Market corrections, though uncomfortable, serve a critical purpose in investment cycles by shaking out excesses and creating opportunities for discerning investors. By maintaining perspective, staying disciplined, and focusing on quality, we can navigate current challenges and emerge stronger.
Stay invested. Stay disciplined.
Disclaimer: The views 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.
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