Sensex, Nifty down 10% from peak amid FII exodus: What should be your trading strategy in correction phase?

The Indian stock market logged its sixth weekly loss in seven weeks, as worries about a slowdown in consumption added to concerns over earnings moderation and foreign outflows. Domestic equity benchmarks Sensex and Nifty 50, after smashing many record peaks this year, slipped into a correction mode, with the indices falling 10 per cent from their record high peak hit in September 2024.

The frontline indices were dragged by consistent foreign fund outflows, weak corporate earnings, stretched valuations, and the latest retail inflation hitting a sizzling 14-month high due to high food prices. The NSE Nifty 50 fell 0.11 per cent to 23,532.7, closing below the 200-day moving average for the first time since April 2023. The 30-share BSE Sensex fell 0.14 per cent to close at 77,580.3 yesterday.

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Both benchmarks lost about 2.5 per cent for the week. Twelve of the 13 major sectors logged weekly losses. The small—and mid-caps underperformed, losing 4.6 per cent and 4.1 per cent this week, respectively. The Nifty and the small- and mid-cap indexes had slipped into correction in the previous session after a prolonged weak spell.

The BSE benchmark Sensex hit its record peak of 85,978.25 on September 27 this year, and the NSE Nifty also reached a lifetime high of 26,277.35 on the same day. However, markets came under bear attack from October onwards. The BSE benchmark gauge is down a massive 8,397.94 points, or 9.76 per cent from its all-time high, and the Nifty has also lost 2,744.65 points, or 10.44 per cent, from the record.

D-Street experts say in addition to inflation concerns, weaker-than-expected quarterly earnings and sustained foreign outflows—amounting to nearly ₹22,156 crore so far this month—contributed to the subdued investor sentiment. 

"Selling pressure was widespread, with the banking sector facing the steepest losses, driven by expectations that the Reserve Bank of India may further delay interest rate cuts due to persistently high inflation, further dampening market sentiment," said Vishnu Kant Upadhyay, AVP - Research and Advisory at Master Capital Services Ltd.

Also Read: Decoding India’s food inflation | Vegetable prices sizzle to 57-month high; Any respite in near-term? Experts weigh in

The weakness, which pulled the indices from record highs and confirmed that the market had entered the correction phase, was chiefly due to a disappointing corporate earnings season and foreign outflows worth $15 billion in the last 33 sessions. In October alone, the BSE benchmark slumped 4,910.72 points, or 5.82 per cent, and the Nifty tumbled 1,605.5 points, or 6.22 per cent.

Foreign investors pulled out a massive ₹94,000 crore (around $11.2 billion) from the Indian stock market in October, making it the worst-ever month in terms of outflows, triggered by the elevated valuation of domestic equities and attractive valuations of Chinese stocks. The outflow came after a nine-month high investment of ₹57,724 crore in September this year.

According to Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, “During a correction phase in the market, like the present one, there will always be counter moves, facilitating a bounce back. This can happen anytime now. The huge liquidity at the disposal of domestic investors can trigger this bounce back. However, such a bounceback is unlikely to be sustained since the fundamental factors are unfavourable.”

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"The Trump factor has already triggered many profound changes in markets. The dollar index is strong and rising, currently at 106.61. The US 10-year bond yield is at 4.48 per cent. These two are strong headwinds for equity markets in emerging economies like India. The positive factor is the huge liquidity at the disposal of domestic investors and the sustained flows into these funds," added Dr. V K Vijayakumar. According to the market expert, domestically, the worry is the disappointing Q2 results and the consensus earnings downgrade.

Indian stock market in correction phase: What should be your trading strategy?

The strengthening of the US dollar and rising US bond yields following political changes in the US have added pressure on the Indian market. Despite a reduced rate of outflows recently, foreign portfolio holdings of Indian stocks have reached a 12-year low. They are expected to decline further, as demonstrated by substantial domestic equities sales by foreign investors in recent months. 

Also Read: Nifty Auto stocks lose nearly ₹6 lakh crore in market cap amid recent selloff

"In such volatile periods, algorithmic trading and hedging strategies can offer investors valuable tools to mitigate risks and navigate market corrections. Algorithmic trading uses complex mathematical models and fast computing to execute trades at optimal times, which helps investors respond to market shifts quickly and efficiently," said Rahul Ghose, CEO of investment tech platform Hedged.in.

Ghose says this enables automatic portfolio adjustments, reducing human error and emotion-driven decisions. "Hedging strategies, such as using options and futures contracts, allow investors to protect against downside risks by offsetting potential losses with gains from these derivative instruments. This balanced approach can help investors maintain stability and limit their exposure to sharp market downturns, supporting more controlled investment management," he added.

D-Street experts also believe that Nifty's 10 per cent correction is a golden opportunity for mutual fund investors to strengthen their portfolios. According to recent AMFI data, equity mutual fund inflows surged to ₹41,886 crore in October, marking a 22 per cent increase from the previous month. respectively.

“With the Nifty down 10 per cent from its 52-week high, the recent market correction presents a strategic entry point for mutual fund investors. Despite the short-term decline, the broader trend remains positive, as seen in year-on-year gains across small-cap, mid-cap, and large-cap indexes, which are up roughly 10-15 per cent,” said Swapnil Aggarwal, Director, VSRK Capital.

Also Read: US inflation rises 2.6% YoY in first annual acceleration since March; Wall Street sees fewer rate cuts in 2025

"It reinforces the importance of a long-term approach rather than reacting to temporary market fluctuations. Investors can view these market dips as opportunities to strengthen their portfolios, particularly as markets typically recover over time, reflecting economic resilience. This level presents an attractive investment opportunity for those with additional funds, especially in mid-cap, large-cap, and consumption-driven mutual funds, to leverage long-term growth potential," added Aggarwal.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.