The Indian equity markets experienced significant volatility on Thursday, February 19, resulting in substantial financial losses for investors. During the trading session, the benchmark BSE Sensex crashed by approximately 850 points. 75. This widespread sell-off led to a sharp decline in the total market capitalization of BSE-listed companies, which dropped from ₹472 lakh crore in the previous session to ₹468 lakh crore. Consequently, investor wealth worth nearly ₹4 lakh crore was wiped out in a single day, with mid-cap and small-cap stocks bearing the brunt of the selling pressure.
Impact of Profit Booking and Domestic Factors
According to market analysts, the domestic market is witnessing a phase of profit booking following a recent rally, while until Wednesday, both the Sensex and Nifty 50 had maintained a winning streak for three consecutive sessions. With major economic events such as the Union Budget, India-US bilateral agreements, and the Reserve Bank of India (RBI) monetary policy concluded, the market is currently facing a dearth of fresh positive domestic triggers. The completion of the third-quarter corporate earnings season has also prompted investors to lock in gains at higher levels, leading to a lack of momentum in the indices.
US Federal Reserve Meeting and Interest Rate Uncertainty
Minutes from the US Federal Reserve's January meeting have indicated that policy officials remain divided over the future course of action regarding interest rates. Reports suggest that while some officials believe rate cuts could be considered if inflation continues to cool, others argue that persistent price pressures might necessitate maintaining a restrictive stance for longer. The possibility of a prolonged pause or even a rate hike by the US Fed could strengthen the Dollar Index, potentially impacting foreign institutional investor (FII) inflows into emerging markets like India. FIIs had only recently turned net buyers in February after months of selling.
Geopolitical Tensions Between US and Iran
Rising geopolitical tensions in the Middle East have Notably weighed on investor sentiment. Reports from international media outlets, including CNN and Axios, have suggested that the US military might be preparing for operations against Iran. These reports indicate that the potential campaign could be an extensive multi-week operation rather than a brief strike, creating a war-like atmosphere. Market experts note that investors are reducing their exposure to risky assets ahead of the weekend to hedge against any escalation in global tensions, further accelerating the market downturn.
Surge in Global Crude Oil Prices
The spike in international crude oil prices has emerged as a major concern for the Indian economy, while 35 per barrel. 53 per barrel. As one of the world's largest oil importers, high energy prices are detrimental to India's fiscal health, as they lead to a wider trade deficit and put pressure on the Indian Rupee. Increased fuel costs also impact the operational margins of various industries.
Valuation Concerns in Mid-cap and Small-cap Segments
High valuations in certain segments of the market have also contributed to the current correction. Data from Geojit Financial Services indicates that while the Nifty index is trading at approximately 20 times its projected earnings for FY2027, the NSE Midcap and NSE Smallcap indices are trading at much higher multiples of 28 and 24 times, respectively. Analysts suggest that while large-cap valuations have become more reasonable, mid-cap and small-cap stocks remain expensive. This valuation gap, combined with the lack of immediate positive catalysts, has kept the market in a volatile range-bound movement.