This photograph will be remembered for a long long time by everyone across the globe!
Over the past two weeks, equity markets around the world have been rattled by Trump’s reciprocal tariffs. The ripple effects of these announcements have been swift and sharp. Global indices have swung wildly, and Indian equities haven’t been spared. Fortunately, we have not been as adversely affected as other countries.
But nonetheless, volatility has surged, investor sentiment has taken a hit, and questions are swirling:
How long will this correction last? What will be the long-term impact of renewed trade barriers? Should one deploy fresh capital now, or wait? What should be done with existing portfolios?
While tariffs are the latest trigger, it’s important to acknowledge that Indian markets have been correcting steadily since September 2024. This is not a one-off reaction, but part of a broader and more nuanced market phase. In such periods of uncertainty, it’s natural to feel anxious. But history shows us that market corrections—though uncomfortable—are not uncommon.
India has seen its share of volatility over the decades, and each time, the market has eventually stabilised and resumed its long-term growth trajectory.
In this edition, I want to step back from the noise and look at the bigger picture. In this blog, I will cover how market corrections have rebounded in the past, what’s driving the current correction, the factors that will drive the recovery for Indian equity markets and what investors should do now.
It’s moments like these that test our discipline, but also offer the greatest potential for long-term wealth creation.
Let’s dive in.
About the last three major market corrections
Market corrections are not anomalies but the norm. The markets have seen multiple events and subsequent corrections that have led to severe losses and mayhem in the markets.
The 9/11 Terror Attacks, US Credit Rating downgrade, Taper Tantrum, Yuan Devaluation, Brexit, Covid crash, and unwinding of the Yen Carry Trade – the equity markets have weathered multiple storms.
In this blog, I will specifically talk about three major stock market corrections since the turn of the century-
- Dot-Com Bubble of 2001
The dot-com bubble of the late 1990s and early 2000s was one of the most dramatic episodes in market history. Fuelled by investor excitement around the transformative potential of the internet, tech companies—many with little to no revenue—were being valued at astronomical levels. Venture capital poured into startups with “.com” in their names, and stock prices surged purely on speculation. The NASDAQ composite index rose by a staggering 582% in five years. Venture capital money continued to pour in hitting an all-time high of USD 105 billion in 2000.
But reality eventually caught up. As it became clear that many of these businesses lacked sustainable models, the bubble burst. Between March 2000 and October 2002, the Nasdaq lost nearly 80% of its value.
While the epicentre was the US tech sector, the impact was felt across global markets—including India. The BSE Sensex fell sharply and the BSE IT index fell approximately 75% during this period. Indian IT companies, though fundamentally stronger than their US counterparts, were not immune to the sell-off. The sector saw a steep decline as global demand weakened and valuations corrected. Capital inflows into Indian equity markets slowed, and investor sentiment remained muted for several quarters.
Recovery began gradually around 2003, driven by several factors. Surviving companies implemented strict financial discipline, focusing on sustainable business models and profitability rather than merely expanding user bases. In India, IT companies pivoted toward diversifying their client base and service offerings beyond just Y2K solutions and basic coding. As global economies stabilised, foreign capital began returning, and Indian markets gradually rebounded by 2003-04.
The dotcom crash was a painful correction, but for Indian investors, it underscored the importance of quality, sustainability, and a long-term view—lessons that remain just as relevant today.
2. Global Financial Crisis of 2008
The global financial crisis of 2008 was the most severe economic downturn since the Great Depression, and its shockwaves were felt across every major economy—including India. The crisis was triggered by the collapse of the US housing market, where years of reckless lending practices, subprime mortgages, and excessive financial engineering created a massive credit bubble. When US home prices began to fall, defaults surged, and large financial institutions that had bet heavily on mortgage-backed securities faced massive losses. Lehman Brothers’ bankruptcy in September 2008 became the tipping point, triggering a worldwide credit freeze and panic in financial markets.
Indian markets, despite having a fundamentally strong banking system and limited exposure to toxic assets, could not remain insulated. The BSE Sensex fell by over 60% from its January 2008 peak. Foreign institutional investors withdrew approximately USD 13 billion from Indian markets in 2008, causing liquidity problems. Export-oriented sectors suffered as global demand contracted, and the rupee depreciated significantly against the dollar. Liquidity tightened, and corporate earnings came under pressure. Investor confidence was deeply shaken, and even long-term investors began to question the resilience of Indian equities.
But just as in previous downturns, the seeds of recovery were sown amidst the crisis. The Indian government and the Reserve Bank of India acted swiftly with fiscal stimulus, rate cuts, and liquidity support. Globally, coordinated policy action helped stabilise the financial system. By mid-2009, confidence began to return. India’s strong domestic consumption, a resilient banking sector, and renewed FII inflows led to a sharp rebound. The Sensex nearly doubled from its lows within a year.
The 2008 crisis was a harsh reminder that global events can significantly impact Indian markets, even if the origin lies elsewhere. Yet it also demonstrated India’s ability to recover quickly, reinforcing the importance of staying invested and focusing on long-term fundamentals.
3. The COVID-19 crash
The COVID-19 crash of 2020 was unlike any other market correction in recent memory—sudden, global, and deeply unsettling. As the coronavirus outbreak spread rapidly across the world, it brought economies to a grinding halt. What started as a health crisis quickly snowballed into a full-blown economic emergency. Markets reacted with unprecedented speed. In just over a month, from mid-February to late March 2020, global indices plunged, with the Indian Sensex falling nearly 40%. Foreign Portfolio Investors withdrew over INR 65,000 crore (approximately USD 8.5 billion) from Indian equity markets in March alone. The rupee weakened to historic lows against the dollar, and GDP contracted by 24.4% in the April-June quarter of 2020.
Investor panic was widespread. There was no playbook for a pandemic of this scale, and uncertainty loomed large. Even high-quality stocks weren’t spared, and portfolios saw deep drawdowns in a matter of weeks.
But the recovery was just as extraordinary as the fall. Governments and central banks around the world responded with aggressive stimulus—rate cuts, liquidity injections, and fiscal support on a scale never seen before. India, too, launched a series of relief packages to support vulnerable sectors and boost consumption. As investors began to look beyond the immediate crisis, markets staged a historic rebound. The Sensex recovered all its losses by early 2021, and sectors like technology, healthcare, and consumer goods led the charge.
The COVID crash taught investors the value of resilience—both in portfolios and in mindset. It reinforced that even the most unexpected crises can create opportunities, and that staying invested through volatility often leads to the most meaningful long-term gains.
So, was it all gloom and doom? Not really!
While market corrections are painful, they do not last forever.
Here’s a brief snapshot of the intensity and duration of these corrections.
That brings me to the next part – what about this correction?
Factors that have driven the recent market correction
While the news headlines only focus on the last two weeks since the announcement of the reciprocal tariffs, let’s look at the correction since the all-time high in September 2024. From large to small cap the benchmark indices have fallen ~15-25%. While the small and mid-caps have taken a heavy beating, the large caps have been slightly insulated.
In my opinion, there are four primary drivers behind the market correction since September 2024:
1. Slowing down of earnings growth
Post-pandemic corporate earnings have normalised after experiencing extraordinary growth (up to 70% quarter-on-quarter). We have seen earnings growth slow down in the last two quarters, and combined with the high valuations, a correction was the natural consequence.
2. High valuations in the small and mid-cap space
We believe the current market correction was overdue and we anticipated it, especially in the small and mid-cap space as they were trading at a 30-40% premium to historical averages. Our analysis highlighted this and since October 2024, we have consistently increased our large-cap allocation and reduced small and mid-cap allocation, benefiting clients.
3. US bonds offer a similar yield without the volatility or currency risk
US bonds currently offer attractive yields without the volatility or currency risk associated with emerging market equities. In addition, US interest rates have risen. This has played an integral role in the factors that led FIIs to withdraw nearly INR 1,50,000 crore from Indian equities in the last six months.
When the Nifty 50 earnings yield relative to US bond yields narrows, as it has recently, international capital tends to reallocate to the US and other emerging markets.
4. And last but not least, Tariffs!
With the situation evolving every day, it will be advisable to wait for further developments in light of the 90-day pause.
How long will this correction last?
While I wish I had a crystal ball to make such predictions, the equity markets are impossible to predict.
But there’s one thing I can say with confidence, market corrections are normal, and not an exception – and they don’t last forever.
The data below succinctly outlines the commonplace nature of corrections.
Across nearly two decades, markets, across segments, have corrected by more than 15% regularly.
And yet, investors who stayed put or added capital during those periods were handsomely rewarded.
Here’s the outcome: After every 15% drawdown, median 3-year returns across key indices have ranged between 14% – 16% CAGR.
If you look at the US markets too, despite repeated downturns, have an enduring long-term upward trajectory.
The chart plots how a single dollar invested in the US stock market, adjusted for inflation, has grown over time—showcasing major crashes from the 1800s to the post-pandemic era.
Silver linings amongst the dark clouds
While the correction since September 2024 has impacted the markets, the India growth story looks promising in the long run.
1. Easing Monetary Policy – In this week’s Monetary Policy Committee (MPC) meeting, the Reserve Bank of India (RBI) announced a 25-basis-point reduction in the repo rate—from 6.25% to 6.00%. Additionally, the MPC changed its stance from neutral to accommodative, clearly signalling support for growth through potential future rate cuts.
GDP growth for FY26 has been revised downwards to 6.5% from 6.7%, reflecting cautious investment and spending due to ongoing uncertainty. However, urban consumption shows signs of gradual improvement.
CPI inflation for FY26 is now projected at 4.00%, slightly down from the previous forecast of 4.20%. Lower crude oil prices have positively contributed to this improved inflation outlook.
2. Tax relief to boost consumption – Recent tax reforms have delivered substantial relief to taxpayers across income brackets, with cumulative tax savings estimated at INR 1 lakh crore. This additional disposable income is likely to boost consumption, particularly benefiting sectors like consumer discretionary, automobiles, and retail.
3. Fiscal consolidation – India has made significant progress in fiscal consolidation, with the fiscal deficit decreasing from 9.2% of GDP in FY21 to 5.6% in FY24, with projections of further reduction to 4.8% in FY25E and 4.4% in FY26E. This disciplined approach to public finances enhances macroeconomic stability, and in turn propels the equity markets.
4. Bank NPAs on the decline – Indian banks have significantly improved their balance sheets, with non-performing assets (NPAs) showing a steady decline since FY18 – A testament to stronger credit discipline and a healthier banking system.
While these aspects look reassuring, most investors are still rattled by the market correction.
What should investors do?
Market corrections offer an excellent entry point for investors looking to make fresh investments. Experienced investors lean into uncertainty, using it as a chance to rebalance, reassess, and accumulate high-quality businesses at attractive prices.
- Equity: In the post-COVID period, investors have seen constant growth in the equity markets with returns ranging 20-22%. This is probably the first time since then that investors are experiencing a market correction. It is time for investors to rationalise their expectations.
Post-COVID, the small and mid-cap segments have seen significant returns and investors have over-allocated to these segments. However, these two segments have also seen the steepest corrections in the last 6 months. Based on the current PE ratio compared to the 5-year average, the large-cap segment is much more reasonably valued compared to the small and mid-cap segments. It would be prudent to stagger investments over the next few months in the large-cap space. With the market becoming increasingly stock-specific and driven by bottom-up narratives, we believe active management is well-positioned to add value. - Fixed Income: With falling interest rates, bond prices are likely to rise, benefiting short to medium-term bonds. We anticipate further rate reductions in upcoming MPC meetings, and fixed-income investors should lock in currently elevated yields through medium-term bonds. Investing now enables you to secure these higher returns before they potentially decrease further.
- Gold: Gold continues to serve as an effective safe-haven asset amidst global uncertainty. A strategic allocation of 5-10% can help enhance portfolio resilience.
In summary
When the screens turn red and sentiment dips, it’s natural to feel anxious. But this is precisely when we should pause, zoom out, and remember—we’ve seen this before. And we’ll see it again.
Markets go through cycles—euphoria, correction, recovery, and growth. Every downturn feels different at the moment, but the long-term patterns remain strikingly similar. What sets successful investors apart is not their ability to predict the next market move, but how they respond when volatility strikes.
If you have regular cashflows, this is a powerful time to stay the course with your Systematic Investment Plans (SIPs). In fact, market corrections work in your favour here—allowing you to buy more units at lower prices and average down your cost. It’s a disciplined, proven way to build wealth over time.
Equally important is asset allocation. Periods of uncertainty are ideal for revisiting your portfolio mix—ensuring it’s aligned with your goals, time horizon, and risk tolerance. A well-diversified portfolio acts like a shock absorber, helping you weather volatility without making emotionally driven decisions.
The headlines may feel unsettling today, but history has shown that patience and consistency almost always pay off. This correction, like others before it, will eventually pass. What you choose to do now—stay invested, rebalance, or panic—will define your long-term outcomes.
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