Nightmare on D-Street: Navigating a crisis, falling knives, and an unusual calm

India’s share markets are reeling from a significant sell-off, just completing a disastrous week and the fifth straight month of free fall. The decline is fuelled by global headwinds and a palpable sense of investor panic. While the Indian economy saw a rebound in the December quarter, it’s still the second-slowest growth in two years. Could the growth recovery be fragile? Will foreign investors return? Should newbie investors stay put? Above all, is this a temporary dip, or the start of a prolonged bear market?

To address investors’ lingering concerns over this confluence of domestic and international pressures, Mint spoke with market experts to find out whether to expect the markets to regain their mojo or to pack for a long winter.

How deep and widespread is the current correction, and how long could it last?

A widespread market downturn has gripped Indian equities, with the Sensex plummeting 14.5% from its 52-week high and shedding nearly 3% in the last week alone. The damage extends beyond bluechips: the BSE Midcap 150 and Smallcap 250 indices have fallen by 22% and 24%, respectively, from their most recent highs (see chart 1). Small- and mid-cap stocks endured a brutal week, with declines exceeding 4%, a clear sign of heightened investor aversion to risk and potential for continued downward pressure. The market breadth (the advances-to-declines ratio of stocks) worsened further.

But the depth of correction differs by sector. “Stocks and sectors that attracted major flows in 2024 and have disappointed in their earnings are undergoing de-rating pain,” said Siddharth Bhamre, head of research at Asit C. Mehta Investment Intermediates.

Purely looking at stock prices, Bhamre says this can qualify as a bear market, but there’s more: 2024 was the year of excesses, and “now in hindsight, nobody can deny that this is course correction or ‘mean reversion’ in action”.

That said, there can be a disconnect between stock markets and the economy for some time, but a country with 6%-plus GDP growth rates may not get into a structural bear market, he said—unless growth slows significantly.

Is the current gloom unusually protracted? Should it persist, can there be cascading effects for the investment landscape?

Indian equities faced a historic low in February, with the Nifty 50 closing a near-unprecedented streak of monthly losses (the last time the index declined for five months was in 1996). But hold on: the current downturn, since October, still amounts to just a 14.3% drop. Think of the 37% plunge during the 2008 financial crisis or the 29.3% fall during the 2020 covid-led market collapse (see chart 2). Despite the many 20%-plus corrections that the market has seen over the last 30 years, it has demonstrated a strong long-term trend, making gains in 22 of those years.

“Looking back at past corrections—whether it was the Lehman crash (2008), the taper tantrum (2013), demonetization (2016), or covid—these periods always appeared as strong buying opportunities in hindsight,” said Krishna Appala, a senior analyst at Capitalmind Research, in a note. “Today’s correction may feel painful, but history suggests that years from now, it will be viewed similarly.”

Market discipline matters in tough times just as much as in strong ones, and achieving long-term returns isn’t a straight path—it includes periods of steep drawdowns and sharp recoveries, she advises.

Foreign investors are persistently selling from India in China’s favour. Is this trend here to stay, or will it shift?

China's stimulus measures and its undervalued stocks are attracting foreign inflows, and that’s been a dampener for Indian equities. India has seen a dramatic $13-billion withdrawal by foreign portfolio investors (FPIs) in 2025, the biggest outflow among emerging economies (see chart 3). This exodus, dwarfing even South Korea’s and Taiwan’s, signals increased concerns over India's high valuations. In contrast, China and Brazil attracted substantial inflows in 2024—$10 billion and $26.6 billion, respectively, against India's meagre $124 million.

“China's economic stimulus measures and policy support have made its equities more attractive. While the trend of selling India and buying China has been strong in the recent months, it is unlikely to be a permanent structural change,” said Ravi Singh, senior vice-president of retail research at Religare Broking.

“Any further downward movements from the current levels will be the product of exogenous factors that may include the recent tariff actions initiated by the US, the countervailing tariffs imposed by other countries, and the likely disruptions from these moves,” said Joseph Thomas, head of research at Emkay Wealth Management. “There has been talk of China devaluing the yuan to make exports more competitive in the light of the tariff walls erected by the US. If this devaluation happens, it may drag other currencies (such as rupee) lower, too, against the dollar.”

A wave of unease is hitting first-time investors who have only seen the post-covid boom. How will market newbies navigate the crisis?

This downturn is a novel experience for nearly 70% of retail investors, who entered the market in the last three to four years. While domestic investors have largely continued to invest despite sustained foreign selling (see chart 4), a sense of unease is growing. Fewer new retail investors are signing up now, with the BSE adding 18 million accounts in the last five months, against 22 million accounts in the five months to September 2024. “If we remove greed and fear from our decision-making, we don’t get nightmares,” Bhamre said. “...Small investors shouldn’t lose faith in the markets and withdraw funds when it’s actually time to invest.”

Large- and mid-cap stocks now appear attractively priced, while small-caps’ valuations remain elevated. Given this disparity, can large- and mid-caps offer safer shores, or are there hidden risks here as well?

While large- and mid-cap stocks have seen their valuations fall below historical averages, potentially offering attractive entry points, small-cap stocks, despite a heavy pullback, have largely maintained their elevated valuations (see chart 5). That sets the stage for further correction risks.

Narendra Solanki, head of fundamental research at Anand Rathi Shares, advises a stock-specific approach. “A selective investment strategy is more prudent at this stage than broad thematic strategies based purely on market capitalization,” he said.

Bhamre cautions against relying solely on historical valuations. “Historical averages have been skewed higher due to excessive valuations over the past two years.” He notes that many stocks remain above pre-covid levels, suggesting historical averages may not accurately identify attractive entry points.

Some stocks have even dipped below their pandemic lows. Do they offer true value opportunities, or are they 'falling knives' best left untouched?

In the recent market decline, 1% of stocks have experienced catastrophic losses exceeding 80%, while another 59.7% have seen declines of 25-50% (see chart 6). Alarmingly, 8% are now trading below the March 2020 lows, signalling profound erosion of market confidence.

“Not every stock that has declined will rebound,” Solanki warned. “A price drop often signals deeper shifts in market dynamics. Investors should assess individual companies’ fundamentals rather than assume a blanket recovery.”

Bearish whispers are filling the air, yet the Nifty Vix, the market's 'fear gauge', remains subdued. Is this an illusion of calm before a storm, or does it reflect underlying market resilience?

The Vix, measuring 30-day implied volatility, currently sits below 14, indicating a period of reduced perceived risk (see chart 7). “The regulator and stock exchanges have de-risked the system by reducing leverage, which has lowered the systemic risk,” Bhamre said. “Also, factors like the tariff war, earnings disappointments, or dollar appreciation were known to markets; the correction is more a function of changing liquidity flows than an unexpected shock.”

The path ahead will be driven by factors like US interest rates, India's economic growth, trade tariffs, global economic weakness, and geopolitical instability. “Overall, markets are likely to remain in a highly volatile zone in March as well and investors need to remain cautious over their investments,” Singh said.

(The story has been updated to say 59.7% of stocks have seen declines of 25-50%. The earlier version said around 27% of stocks had seen this decline.)