The recent dip in Indian indices has sparked debate among investors and analysts: Is it a mere bull market correction, or does it signify something more profound? While some view it as a temporary setback in an otherwise strong upward trend, others caution against complacency, citing domestic and global factors that could trigger further market volatility.
Several factors suggest that the recent downturn could be a simple correction within a larger bull market. India's economy is projected to grow at a healthy pace, with real GDP expected to increase by over 6% in FY25 and FY26. Inflation is also declining and expected to remain benign in the coming months. The Reserve Bank of India (RBI) projects CPI inflation to be 4.8% in FY25 and 4.2% in FY26. Moreover, domestic demand for stocks has grown rapidly in recent years, supported by strong domestic flows, increasing retail participation, and attractive after-tax returns on equities. Foreign portfolio investors (FPIs) have also returned to the Indian market in recent sessions, further boosting market sentiment. Historically, market corrections exceeding 10% (excluding the global financial crisis and Covid-19) have averaged 14% and typically resolved within 70 days. The current correction, with the Nifty 200 experiencing a 16% decrease over 165 days, is one of the most significant and extended downturns in recent market history, but it aligns with the historical pattern of corrections within a bull market.
However, several factors suggest that the recent dip may be more than just a bull market correction. Corporate earnings have slowed down due to decelerating demand and higher input costs. Concerns over stretched valuations, particularly in the mid- and small-cap segments, have also dampened investor confidence. Moreover, global factors such as rising US bond yields, trade tensions, and geopolitical risks could negatively impact the Indian stock market. The Indian stock market ended FY25 with a modest gain of 5.34% despite a massive selloff in the second half of the year due to stretched valuations, weak earnings, heavy foreign capital outflow amid rising US bond yields and the dollar, and global uncertainty. The frontline index, Nifty 50, hit its all-time high of 26,277.35 on September 27 last year but failed to sustain gains and entered a downward spiral. Historically, the BSE SENSEX Stock Market Index reached an all time high of 85978.25 in September of 2024.
Moreover, some experts caution that the Indian stock market may be closer to a downturn than many investors expect. They point to concerns over US fiscal policy, trade tensions, and debt sustainability as potential risks that could weigh on Indian markets. Concerns align with broader anxieties about India's high market valuations, with some experts believing current valuation levels pose a risk to sustained future gains.
Ultimately, whether the recent dip in Indian indices is simply a bull market correction or something more depends on various factors, including the trajectory of economic growth, corporate earnings, global market conditions, and investor sentiment. While India's strong economic fundamentals and growing domestic demand for stocks provide support for a continued bull market, investors should remain cautious and monitor potential risks.
