₹6 Lakh Crore Wiped Out: 5 Factors Driving the Stock Market Crash

Introduction

The Indian stock market witnessed a sharp downturn on Friday, January 23, erasing the previous day's gains and resuming a broader downward trend. A confluence of negative factors, including persistent geopolitical uncertainties, pre-budget nervousness, and significant foreign fund outflows, triggered a widespread sell-off. The Sensex crashed 770 points, or 0.94%, to close at 81,537.70, while the Nifty 50 dropped 241 points, or 0.95%, to settle at 25,048.65. The decline resulted in a massive erosion of investor wealth, with over ₹6 lakh crore wiped out in a single trading session.

A Broad-Based Sell-Off

The market decline was not confined to the benchmark indices. The sell-off was more pronounced in the broader market, indicating a widespread risk-off sentiment among investors. The BSE Midcap index fell by 1.6%, and the BSE Smallcap index dropped by a steeper 2.2%. This broad-based participation in the decline highlights the depth of investor concern. The overall market capitalisation of BSE-listed companies fell from ₹458.5 lakh crore in the previous session to below ₹452 lakh crore, reflecting the significant wealth destruction that occurred.

Geopolitical Tensions Rattle Investors

Global headwinds played a crucial role in souring market sentiment. Persisting geopolitical uncertainties, particularly concerning US trade policies, kept investors on edge. Ambiguity surrounding a potential US-NATO deal related to Greenland and renewed threats of a trade war with the European Union have created a fragile environment for global equities. More specific to India, markets are closely watching the outcome of a US Supreme Court ruling on the legality of tariffs imposed by the Trump administration. There are concerns that the US could levy tariffs as high as 500% on countries, including India, that continue to purchase Russian crude oil. This uncertainty has led to caution and risk aversion.

Rupee Hits a Record Low

Adding to the market's woes, the Indian rupee weakened to a record low against the US dollar. The currency hit 91.99 per dollar during intraday trade on Friday, a significant blow to investor confidence. A depreciating rupee increases the cost of imports, which can fuel domestic inflation. It also erodes the returns for foreign investors, often prompting them to pull capital out of the country's equity and debt markets. The rupee's sustained weakness, having fallen over 2% this year after a 5% decline last year, remains a key factor contributing to the sombre mood on Dalal Street.

Relentless Selling by Foreign Investors

Foreign Institutional Investors (FIIs) have been consistent sellers of Indian equities, and this trend intensified in January. According to market data, FIIs have sold Indian stocks worth over ₹36,500 crore in the cash segment this month alone. This relentless selling pressure has capped any potential upside in the market and has amplified downward moves. According to VK Vijayakumar, Chief Investment Strategist at Geojit Investments, FIIs are adding to their short positions on every rally, indicating a bearish outlook. The continuous withdrawal of foreign capital is a major force dragging the market down.

Key Market Data at a Glance

Mixed Earnings and Technical Weakness

On the domestic front, the ongoing third-quarter earnings season has provided little comfort. Mixed results from corporate India, including misses from market heavyweights like Reliance Industries and ICICI Bank, have raised concerns about lofty valuations. This has made investors more selective and cautious. Furthermore, technical factors have exacerbated the sell-off. Key benchmark indices breached crucial psychological and technical support levels. The Nifty 50's fall below the 25,250 mark triggered further selling pressure. According to technical analysts, the formation of a long bearish candle on the daily charts suggests that the weak sentiment may persist, with potential for further downside unless a strong positive trigger emerges.

Market Impact and Analysis

The sharp correction was not the result of a single factor but rather a perfect storm of global and domestic headwinds. The combination of geopolitical risk, a weakening currency, sustained FII outflows, and patchy corporate earnings created a powerful incentive for investors to book profits and reduce their exposure to equities. The risk-off sentiment was evident in the broad-based nature of the selling, which affected nearly all sectors. The market is currently grappling with a high degree of uncertainty, which is likely to keep volatility elevated in the near term.

Conclusion

The significant fall in the Indian stock market underscores the fragile state of investor sentiment. The market is currently weighed down by a combination of international geopolitical risks, a record-low rupee, persistent selling from foreign investors, and caution ahead of the Union Budget 2026. Looking ahead, the market's direction will likely be dictated by developments related to US trade policies, the upcoming budget announcements, and the trajectory of FII flows. Investors are advised to remain cautious as volatility is expected to continue.