A 7% plunge in one month, what's happening to the Indian stock market?

The "carnival" in the Indian stock market seems to be coming to an end. Dragged down by slowing corporate profits, overvalued valuations, and outflows of foreign funds, the NIFTY index, the benchmark stock index in India, has dropped by about 7% from its historical high.

On Tuesday, the Indian stock market experienced its largest single-day decline in about three weeks. The NIFTY50 fell by 1.25% to 24472.1, with 47 stocks in the red; while the SENSEX index dropped by 1.15% to 80220.72.

Small-cap stocks and mid-cap stocks fell by about 4% and 2.6% respectively, marking the worst trading day since August 5; all 13 major industry indices declined.

On the morning of the 23rd, Goldman Sachs downgraded its rating on the Indian stock market from overweight to neutral, with a 12-month NIFTY target of 27000 points, implying a 9% upside potential.

"Under the backdrop of slowing profits and foreign selling, the poor performance of the broader market is the real pain point for the market. As long as this trend continues, any intraday rebound will be short-lived," said Aditya Gaggar, Director of Progressive Shares.

Retreat from the highs, shrinking corporate profits in the Indian stock market

Since hitting a historical high on September 27, the Indian stock market has seen a wave of profit-taking, with the NIFTY index falling by about 7% from its peak.

Yesterday, India's largest IPO deal—Hyundai India —saw a 7.2% drop on its first day of listing. The market is increasingly concerned that India may not be able to sustain its high premium valuations since 2021.

The valuation of the MSCI India Index is still nearly 24 times its 12-month forward earnings, compared to a five-year average valuation of around 21 times.

Corporate profits are also contracting. Compared to the first quarter, the pace of profit recovery for Indian companies in the second quarter was lower than expected. Slow corporate profits are attributed to weak domestic and international demand, slowing government spending, and persistently high global inflation.

Among other individual stocks, Jana Small Finance Bank saw a 10.4% decline in its stock price yesterday due to a drop in quarterly net profit in September and continuous deterioration in asset quality. Non-bank lender L&T Finance fell by 7.1%, marking its largest decline since early March.

Foreign fund outflows, Fed rate cuts... Challenges facing the Indian stock market

As of Monday, foreign investment institutions have been net selling Indian stocks for 16 consecutive trading days.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, stated: "The trigger for this adjustment comes from the continuous selling by foreign investors."

Indian stocks are facing challenges from the Chinese market. Since the end of September, many overseas investors have chosen to invest in China and withdraw from India following a series of stimulus plans.

Analysts believe that due to the persistently negative market sentiment and lackluster performance, the recovery of Indian stocks seems to be very difficult. Siddhartha Khemka, Head of Wealth Management Research at Motilal Oswal Financial Services Ltd., said:

"With expectations of a moderate rate cut by the Federal Reserve, the rise in US bond yields has led to global market weakness, with funds flowing out of emerging markets such as India. Second-quarter earnings also show signs of slowing down, weakening market sentiment.

Overall, we expect the market to continue to face pressure, driven by results-oriented actions."