The Indian equity markets have been ‘imploding’, falling 15 percent from their September 2024 peaks, eroding nearly ₹1 lakh crore of investors’ wealth. Over the past five months, the unprecedented and persistent fall has clouded investor sentiments with fear and gloom. In the recent past—February-April 2020—we have seen the indices taking bigger hits of over 30 percent, but this time, the negative sentiments are more broad-based and hence more structural. FIIs have been dumping Indian stocks for more lucrative destinations—the US, China, etc—due to stretched valuations of Indian equities and lower profitability of Indian corporates, a sombre economic prospect in the medium term and given the uncertainties around Trump’s economic policies. India’s fiscal policies have not helped the markets either. The decision to increase the short-term and long-term capital gains tax rates last year has also made the Indian equities market less lucrative for foreign portfolio investors. The reasons are many and fundamental in nature, so the bear grip is tighter this time.
While one cannot sit quietly seeing the value of their portfolio falling persistently, knee-jerk reactions by the investors or the government would be unwarranted. The government must resolve basic issues—making policies which boost the economy—instead of trying to tinker with the natural course of equity markets. If it can reverse its capital gains tax decisions of last year, it might inject some positivity into the market in the short term. Investors, on their part, can follow the basic lessons of investing and invest in quality stocks, now available at cheaper valuation, diversify portfolios across assets and geographies, stay away from small-cap stocks for now, and invest regularly instead of making large commitments at one go. The current bear run is not the end of the world for investors. Treat the current phase in the market as a clean-up of excesses built over the past two years during the market’s one-way movement upwards. The theory of mean reversion—asset prices reverting to historical means or averages—is playing out in Indian equities markets, not for the first time. As and when clouds of global uncertainties disperse, and the conditions become more amenable for business and economic activities, equity investors will see the light at the end of the tunnel.