Sensex Drops 636 Points, Nifty Falls Below 24,550: 6 Key Reasons Behind Today’s Market Selloff
India’s benchmark stock indices — the BSE Sensex and Nifty 50 — witnessed a sharp decline on Tuesday, June 3, as investor sentiment turned risk-averse amid mounting global and domestic headwinds. The Sensex plunged 636 points(0.78%) to settle at 80,737, while the Nifty shed 174 points (0.70%) to close at 24,542, slipping below the psychologically significant 24,550 level.
This marks the third consecutive session of losses for Indian equities, with a total market capitalization erosion of ₹2.5 lakh crore, bringing the cumulative value of BSE-listed companies down to approximately ₹443 lakh crore.
In this blog, we explore the six primary factors driving the selloff in the Indian equity markets today:
1. Stretched Valuations Weigh on Investor Confidence
Despite periodic corrections, Indian equity markets continue to trade at elevated valuations, particularly in the broader markets. According to a report by Kotak Institutional Equities, sectors across the board are facing “expensive valuations,” which may not be sustainable in the face of slowing domestic and global growth.
Market expert Sanjeev Prasad pointed out that sectors reliant on consumption, investment, and outsourcing are all seeing headwinds, which makes current valuations difficult to justify. The Nifty 50's PE ratio, which remains above its historical average, further reinforces concerns about overvaluation.
2. FII Selling Intensifies on Valuation Concerns
Foreign Institutional Investors (FIIs) have turned net sellers, offloading equities worth ₹2,590 crore on Monday alone. This trend is worrying market participants as FIIs typically play a crucial role in supporting bullish market sentiment.
Analysts such as Deepak Jasani attribute the selling to FII discomfort with high valuation levels. “There’s a threshold beyond which FIIs are unwilling to deploy fresh capital, particularly in sectors that have already seen considerable price appreciation,” Jasani remarked.
3. Global Headwinds and Trade Tensions
Negative cues from global markets have also dampened investor mood. Data from China — one of India’s key trading partners — revealed that its manufacturing PMI dropped to 48.3 in May, indicating contraction for the first time in eight months. This follows the imposition of new U.S. tariffs, fueling fears of renewed US-China trade tensions.
Additionally, U.S. stock futures like the Nasdaq-100 and Dow Jones are trading lower, adding to the uncertainty. Erratic U.S. trade policy, including unpredictability around tariffs and trade agreements, is exacerbating the nervousness in global markets.
4. Foreign Capital Outflows Driven by Bond Yields
The appeal of emerging markets like India often diminishes when U.S. Treasury yields rise, as higher yields in safe-haven assets lead to capital outflows from riskier assets. The recent surge in U.S. bond yields is causing foreign portfolio investors (FPIs) to pull back from Indian equities.
In just the last two trading sessions, FPIs have sold over ₹9,000 crore worth of equities. Analysts warn that unless bond yields stabilize, this pressure from foreign capital outflows could continue, further suppressing market momentum.
5. Lack of New Domestic Triggers
The domestic market has also been lacking fresh positive catalysts to support a sustained rally. While Q4FY25 earningswere broadly in line with expectations, they did not offer any major upside surprises.
According to Motilal Oswal Financial Services, forward earnings revisions remain weak, with more companies facing downgrades than upgrades. This absence of strong corporate performance, combined with the high valuations, limits upside potential in the short term.
Markets are now closely watching the Reserve Bank of India’s Monetary Policy Committee (MPC) meeting scheduled for June 6. Though a 25 basis point rate cut is expected, most believe it has already been priced in, and therefore may not offer a strong trigger for a rally.
6. Escalation in the Russia-Ukraine Conflict
The Russia-Ukraine war has seen a renewed escalation following Ukraine’s attacks on Russian military airfields over the weekend. These developments have reignited geopolitical risks, impacting investor sentiment globally.
According to Ross Maxwell of VT Markets, this ongoing war — now stretching into its fourth year — continues to reshape global risk appetite, especially as it influences inflationary trends, energy policy, and capital flows. Any fresh escalation is likely to further shake investor confidence in riskier assets.
Sectoral Impact: Financials, IT, and Adani Group Drag Down Markets
Among the worst-performing stocks were names from rate-sensitive sectors like financials and real estate, along with select IT companies. Stocks from the Adani Group, Coal India, Bajaj Finserv, and L&T were among the top laggards on the Sensex and Nifty.
However, the BSE Smallcap Index remained relatively flat, and the BSE Midcap Index declined only 0.4%, showing some resilience compared to large-cap counterparts. This divergence could suggest that retail participation in mid- and small-cap counters remains strong for now.
Technical Outlook: Watch 24,500 on the Nifty
From a technical perspective, the 24,500 mark on the Nifty has emerged as a key short-term support level. Rupak De, Senior Technical Analyst at LKP Securities, believes that a breach below this level could trigger a steeper fall towards 24,000.
“However, if the Nifty manages to hold above 24,500, we could see a bounce back to 24,700–24,750 in the near term,” he added.
Final Thoughts
The market correction seen today underscores the fragile balance between optimism over India’s long-term growth and the near-term challenges of high valuations, global risks, and foreign outflows. While India’s macro fundamentals remain strong, elevated valuations combined with external volatility create a tricky environment for investors.
With the RBI policy announcement on June 6 and ongoing geopolitical and trade developments globally, market participants should brace for continued volatility and remain selective in their investment approach.
Disclaimer: This blog is for informational purposes only and does not constitute investment advice. Always consult a financial advisor before making investment decisions.
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