India's stock market turmoil: A case of market psychology or impact of market fundamentals?

The Indian stock market has been experiencing significant turmoil over the past five months, with share prices plummeting, market indices dropping sharply, and investors facing colossal losses.

- Arnab Majumdar

An estimated ₹ 94 lakh crore has been wiped out from the market during this period. Both the Sensex and Nifty indices have declined by approximately 16%, marking the steepest fall in three decades. February 2025 was particularly devastating, with ₹ 40 lakh crore in investor wealth eroded. The market capitalization of BSE-listed companies has dropped dramatically from ₹478 lakh crore in September 2024 to ₹ 384 lakh crore by the end of February 2025.

The key question is: What has caused this massive downturn in the Indian stock market? The primary factor identified is the large-scale offloading of investments by Foreign Portfolio Investors (FPIs). Since October 2024, FPIs have withdrawn about $29 billion from Indian equities— the largest outflow in any six-month period. In just the first half of March 2025, FPIs have sold Indian stocks worth $3.5 billion, with the technology sector facing the highest divestment, followed by the consumer goods sector. Interestingly, almost all of the funds withdrawn from India have been redirected to the Chinese stock market.

But why are FPIs moving their investments from India to China? What has made the Indian market, once a top investment destination, so unattractive to them? Has there been a significant policy shift that discouraged FPIs? Has the Indian economy performed poorly? Have corporate profitability levels plummeted? Or is the future outlook for the Indian economy and industry so bleak that investing in Indian stocks now poses a significant risk?