The Indian equity markets experienced a sharp decline on Monday, with the BSE Sensex and Nifty50 both trading deep in the red. This downturn came after a surprisingly strong US jobs report dampened expectations of early interest rate cuts by the Federal Reserve, as well as concerns over slowing corporate earnings. The BSE Sensex dropped more than 1,100 points, hitting a low of 76,250, while the Nifty50 fell by 350 points, reaching 23,047.
The market capitalisation of all listed companies on the Bombay Stock Exchange (BSE) also suffered a significant setback, decreasing by Rs 14.54 lakh crore to Rs 416.08 lakh crore. All major sectoral indices were in the negative territory, and the broader indices, which are more domestically focused, also saw declines of about 1.4%.
The primary cause for this market turmoil was data released on Friday, revealing that US job growth in December had unexpectedly accelerated. The US economy added 2.56 lakh jobs in December, well above the expected 1.65 lakh, while the unemployment rate dropped to 4.1%. This robust economic performance raised the likelihood that the Federal Reserve would hold interest rates higher for longer, which could be detrimental to emerging markets like India.
V K Vijayakumar from Geojit Financial Services explained, “The blowout jobs data from the US means the rate cut expectations for 2025 have now dropped to just one. The US economy no longer requires stimulus, and this good economic news is turning out to be bad news for markets, which had discounted many rate cuts this year,” as reported by Economic Times.
In response, US 10-year Treasury yields surged to 4.73%, the highest since April, as bond yields and the dollar strengthened. The Federal Reserve is expected to maintain its rates in January, further pressuring emerging markets like India. Vijayakumar also noted that the surge in bond yields would likely result in continued selling by Foreign Institutional Investors (FIIs), creating opportunities for long-term investors, particularly in banking stocks.
In addition to the challenges presented by the US economic data, India is also facing continued selling pressure from foreign investors. As of January 10, 2025, Foreign Portfolio Investors (FPIs) and FIIs had offloaded Rs 22,259 crore worth of Indian equities. This trend of selling is likely to persist into the new year.
The pressure on Indian markets was compounded by rising oil prices, which hit their highest levels in over three months. Brent crude futures climbed to $81.11 a barrel, and US West Texas Intermediate crude rose to $77.97 a barrel. The spike in oil prices is linked to expectations of tighter supplies due to US sanctions on Russian crude exports, affecting key global importers like China and India.
Additionally, the Indian Rupee hit a lifetime low of 86.27 against the US Dollar, as the strong dollar and foreign outflows combined to pressure the local currency. With the Dollar index hovering around 109.9, the falling rupee could further exacerbate the strain on foreign investments.
Economic growth in India also seems to be slowing, with the Ministry of Finance’s advanced estimates indicating a real GDP growth rate of 6.4% for FY25, down from 8.2% in FY24. This slowdown is expected to affect consumer and business confidence and could complicate fiscal planning. Moreover, India Inc has faced earnings downgrades in the last two quarters, and analysts expect a weak performance in Q3.
Investors are also awaiting the latest domestic consumer price inflation data, which is expected to show a drop to 5.3% in December, driven by moderating food prices. If confirmed, this could fuel expectations of an interest rate cut by the Reserve Bank of India (RBI), although if the US Fed holds its rates, the RBI may pause its own cuts to ensure financial stability.
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