Between 2008 and 2025, over a span of 17 years, the Indian stock market has undergone 10 correction phases, including the current consolidation. Each of these corrections was driven by diverse factors, ranging from economic and financial challenges to political and health worries. The ongoing correction is caused by a combination effect of tapering, earnings slowdown, high valuations, and trade uncertainty.
Taper-Tantrum had occurred between June and September 2013, 3 Months, when the U.S. Fed began scaling back its quantitative easing program. This created uncertainty about the global economy’s ability to withstand the impact of reduction in monetary stimulus following the global financial crisis. It led to a rise in bond yields. During this period, the Indian broad market declined by 10.1%.
Similarly, when the Fed began reversing its accommodative monetary policy stance by raising interest rates from near zero in 2016–17, the Indian broad market contracted by 10.8% between October 2016 and January 2017, 3 Months. This correction was further exacerbated by the effects of demonization.
In both the above instances, the key factor was a reversal in Fed monetary policy, which reduced world financial liquidity, appreciated the USD thus leading to market volatility. FIIs selling increased during the period, heavily affecting EM currencies and the stock market.
Similarly, currently we are facing the lingering effect of the contraction of the Fed’s balance sheet. To mitigate the economic impact of the pandemic, the Fed’s balance sheet was expanded significantly from $4.2 trillion in December 2019 to $8.8 trillion in December 2021. Over the past two years, as the global economy has regained stability, the Fed has been reducing this liquidity, bringing the balance sheet down to $6.9 trillion by December 2024.
This withdrawal of excess liquidity is reversing the benefits that drove the global equity market between 2021 and 2024. The impact has been amplified by persistently high interest rates, the U.S. 10-year Treasury yield trend at the upper range of 4.6%. Concerns persist that rates could stay elevated adding to the market volatility.
In addition to the challenges posed by tapering, rising geopolitical worries are exerting further pressure on the markets. A comparable scenario unfolded in the Indian stock market between November 2021 and July 2022, when the broader market declined by 16.7% over 8 Months. This was led by the hyperinflation triggered by the super-accommodative monetary and fiscal policy when the world’s supply capabilities constrained during the post COVID-19 era.
In response, the central banks started to raise interest rates. And the problem of high inflation got multiplied by the Russia-Ukraine war, which started in February 2022. It affects the supply of energy, especially to the European regions, and food grain supply from Ukraine to the rest of the world. The negative effect normalised only over a period as supply constraints improved and central banks decided to support the world financial market with accommodative policy under the geo-political risk.
Currently, geopolitical risks are being compounded by the hawkish stance of central banks, particularly the Fed, with a reduced rate cut intention in 2025 against Trumponomic. But rate cut is a pressing requirement of the economy, as prolonged high inflation and elevated interest rates over the past 2–3 years have been constraining growth.
Currently, India has completed the 4th month of the consolidation, which started on 27th Sept 2024. The broad market correction, the Nifty 500 index, is -13.8% from the peak of Sept to the trough of 22nd Jan 2025.This correction appears to have well addressed the ongoing challenges of the equity market, including the impact of hawkish monetary policies, sluggish earnings growth, and uncertainties in global trade and economic dynamics. We feel that the further downside is protected, making it highly suitable to adopt an accumulation strategy in the short to medium term. The further time of consolidation may continue for a couple of months depending on the settlement to Trumponomics, USD appreciation, and return of earnings growth.
First published in Mint
