Stock Market Crashes Big Time Amid Global Weakness, Trump's Tariff War Acts As Catalyst

The Indian stock market experienced significant losses in early trade on Monday, 3rd February, as the Sensex dropped by over 700 points and the Nifty 50 fell below the 23,250 mark, amid weak global cues.

The Sensex opened at 77,063.94, down from its previous close of 77,505.96, and slipped over 700 points to reach 76,791.09.

Similarly, the Nifty 50 opened at 23,319.35, lower than its previous close of 23,482.15, and fell by more than 1% to 23,246.55, according to a report by Mint.

The selloff was more pronounced in the mid-cap and small-cap sectors, with the BSE Midcap and Smallcap indices each plunging by over 1%.

By around 9:20 AM, the Sensex was down 671 points, or 0.87%, at 76,835, and the Nifty 50 had fallen by 219 points, or 0.93%, to 23,263.

The market capitalisation of BSE-listed firms dropped from ₹424 lakh crore to nearly ₹419 lakh crore, resulting in a loss of approximately ₹5 lakh crore for investors.

Experts have identified five key reasons behind the sharp decline in the Indian stock market:

1. Weak Global Cues

The Indian stock market's fall was partly influenced by weak global cues. Major Asian markets experienced significant losses on Monday after US President Donald Trump announced tariffs on Canada, Mexico, and China. This raised concerns about the potential for a broad trade war, which could negatively impact global economic growth. Japan's Nikkei and South Korea's KOSPI fell by 3% each.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted that despite a strong budget in India, the market remains under pressure due to the trade war triggered by Trump's tariffs and the resulting global uncertainty.

2. Trump's Tariff Policy

US President Donald Trump imposed tariffs of 25% on goods from Canada and Mexico, and a 10% levy on imports from China, which led to a slump in market sentiment. Experts warn that this tariff policy could spark a global trade war, potentially derailing the global economy.

Vijayakumar explained that the tariffs imposed on Mexico and Canada were not just trade-related but also aimed at punishing these countries over issues such as immigration and fentanyl trade. While China's response has been more measured, using the World Trade Organisation (WTO) to challenge the US, the ongoing situation has raised concerns among investors.

3. Sharp Rise in the Dollar Index; Rupee Hits Record Low

The Indian rupee fell to a record low on Monday, breaching the 87 mark against the US dollar for the first time. The dollar strengthened sharply against many of its counterparts after Trump's tariffs, which further dampened market sentiment. Vijayakumar pointed out that the surge in the dollar index to above 109.6 would likely lead to more selling by Foreign Institutional Investors (FIIs), adding pressure on the Indian market.

4. Caution Ahead of RBI MPC Meeting

With the Union Budget announcements concluded, investors are now focusing on the outcome of the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) meeting. Experts expect the RBI to lower interest rates by 25 basis points to support consumer demand and economic growth.

5. Continued Foreign Capital Outflow

The persistent selling by foreign institutional investors has been a significant factor in the market downturn since October 2024. FIIs have consistently offloaded Indian equities, and since October 1, 2024, have sold Indian stocks worth nearly ₹2.7 lakh crore. This selling pressure, coupled with stretched valuations, weak quarterly earnings, and rising US dollar and bond yields, has contributed to a prolonged market decline.