Fear-fuelled selling drives Indian markets lower as bear phase looms

Last Friday’s market crash sent an unambiguous message — fear and panic have returned. The take-what-you-can behaviour dragged the Nifty and Sensex down 1.9%, the sharpest fall in four months since foreign investors began their near-daily selling streak.

What started as a ‘healthy correction’ has morphed into a more unsettling question — is this the start of a bear market? From the mid and small-cap indices’ perspective, the answer is already in. Both indices are down over 20%, the textbook threshold for a bear market. The Nifty and Sensex, while more resilient, have shed about 15% from their peaks.

Two questions now dominate investor conversations: how much more selling is ahead, and what could break the spiral? Neither has an easy answer. Markets in the grip of panic rarely behave rationally — buyers disappear, prices unravel, and fundamentals take a backseat. In a bull market, anything is worth buying at any price. In a bear market, anything is worth selling at any price.

Still, a few data points help frame where we stand. A closer look at the top 50 stocks — the bluest of India’s blue-chips — offers a glimpse into the scale of the damage. Tracking their drawdowns from 52-week highs and their one-year returns gives a sense of where the pain is deepest and where gains remain intact.

The list of biggest losers is revealing. Out of the 50 stocks, only four — HDFC Bank, Bajaj Finance, Bajaj Finserv and Kotak Mahindra Bank — have kept their losses under 10%. The rest have fallen anywhere between 20% and 50%, with Tata Motors leading the way, down 50% from its peak.

 

That said, the broader 365-day picture tells a slightly different story. The Nifty is still up 0.65% over the past year, and 21 of the 50 stocks show positive returns over that period. Fourteen of them still boast gains of more than 10%, while eight have delivered over 20%.

 

Bharti Airtel, M&M, Bajaj Finance and Shriram Finance stand out, with gains of 39%, 36%, 31% and 31%, respectively. M&M, however, has also led the latest leg of the auto sector’s decline. Fears of Tesla’s India entry triggered the selloff earlier in the week. Yet, even after the latest losses, investors are still sitting on sizeable gains in such stocks — making them obvious selling targets as portfolios are rebalanced.

That leads to an important dynamic now playing out — basket selling. With 29 of the 50 stocks already in the red, further selling there would mean locking in large losses. To offset that, investors are likely selling outperformers like Bharti Airtel, M&M and Bajaj Finance alongside the laggards. The rotational buying that defines bull markets has flipped into rotational selling. This game will play out until either there is nothing left to sell or incremental selling triggers unacceptable losses across portfolios.

Earnings Watch
Several factors will dictate whether the market can stabilise or spiral lower in the months ahead. The most obvious would be a signal from the Reserve Bank of India. A rate cut could be the circuit breaker that halts the selling in Nifty stocks — but the cut is still at least a month away.

Even then, the playbook may be different. Financials and autos typically rally on rate cuts, but this time, the risk is that any bounce will be quickly sold into. That pattern was evident both on the last policy day and the day of the Union Budget — the appetite to exit remains high.

Policy interventions to spur growth could offer temporary relief, particularly if they force short sellers to cover their positions. But foreign institutional selling has repeatedly overpowered such bursts of optimism.

Mutual fund flows are the next data point to watch closely. January’s net equity inflows held steady at Rs 39,687 million, only marginally below December. But if redemptions accelerated sharply in late February, fresh panic selling could follow. February’s data will hold the answers.

India’s ability to manage external pressures will also shape sentiment. The looming tariff threats and fears surrounding Tesla’s entry have already taken a toll on auto and IT stocks. The extent of damage will depend on whether India can negotiate narrow, sector-specific tariffs rather than broader economy-wide measures.

The next few months will be a true stress test for fundamental investing. Corporate India’s full-year results will either validate or call into question the severity of the current selloff.

Brokerage research reports, due in the coming weeks, will offer an early read on how analysts are recalibrating earnings estimates. Company guidance will be key in determining where selective buying might emerge.

April, the start of a new financial year, adds another layer of potential volatility. Budget-driven tax relief — especially the zero tax slab for incomes up to Rs 1.2 million — could spur some hope for a consumption revival. However, that optimism will be tempered by how the monsoon forecast shapes up. A strong rural recovery would be a much-needed tailwind for earnings across multiple sectors.

The next three months could see wild swings as the market hunts for a new equilibrium. In fact, confirmation of bad news could itself become a form of relief — allowing markets to recalibrate to reality instead of fearing the unknown.

Where exactly that new floor lies remains unclear. One sign to watch is the rhythm of buying. If every two or three days of heavy selling is followed by a day of meaningful buying, it would be a strong indication that the bottoming-out process has begun.

For now, watch the charts.