It's hard to believe that India, once heralded as a rising economic star, is now navigating through a storm of financial turmoilStruggling under the weight of a depreciating currency, a plummeting stock market, and an exodus of foreign capital, the reality of India's economic landscape has shifted dramaticallyThe current challenge is not just a minor hiccup but a serious test of the country's economic resilience.

Let’s first delve into the grim state of the Indian currency and stock marketOn February 5, the Indian rupee fell to a record low against the US dollar, reaching a staggering 87 rupees to one dollarFollowing a turbulent period starting in the second half of 2024, the depreciating pace of the rupee soared, triggered by changes in US tariff policies that sent shockwaves through the forex marketWhat was a modest decline of approximately 0.5% in 2023 transformed into a sharp 2.9% drop in subsequent months, leaving many investors rattled.

Simultaneously, foreign institutional investors, who had previously been supportive of Indian equities, began a frantic sell-offBy October 2024, there was an unprecedented wave of liquidation in the Indian financial markets, with net sales climbing to a staggering ₹940 billion – the largest single-month outflow since 2002. This mass exodus of capital not only created a downward spiral for the stock market but also ignited widespread concern regarding the future prospects of the Indian economy and its investment climate.

The sell-off did not abate in the following months; the January 2025 net outflow remained high at ₹780 billionConsequently, the SENSEX, a benchmark index for Indian equities, has experienced an alarming decline, falling roughly 10% from its peak in September 2024. So, what is driving this persistent downward trend in Indian stocks? A closer look reveals a troubling connection to the overall slowdown of the Indian economy.

One of the most pressing issues is the dismal performance of Indian companies

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Several corporations have recently reported earnings that missed market expectations, triggering panic among investors and amplifying the pressure to sellNotably, Tata Motors, a major player in the Indian automotive industry, disclosed late January that its net profit for the October to December quarter of 2024 plummeted by 22% compared to the previous yearSuch significant declines in earnings naturally weighed down its stock prices.

Similarly, Larsen & Toubro, a giant in the construction sector, reported earnings per share that failed to meet market forecasts, causing its stock price to fall by 6% since the end of 2024. Poor corporate earnings serve as an indication of a broader economic slowdown, reflecting a palpable deceleration in India’s growth trajectory.

Further dissecting the data, the real GDP growth rate for the July to September 2024 quarter was merely 5.4%, down from 6.7% during the previous quarterAdditionally, government projections for the fiscal year 2024 point to a further slowdown in the real GDP growth rate, anticipated to be around 6.4%, a stark decline from the impressive 8.2% recorded in 2023. Such projections paint a concerning picture of an economy that seems to be losing its momentum.

In light of these challenges, both the Indian government and the central bank have begun to take actionThe budget proposal for the fiscal year 2025 introduced on February 1 included measures aimed at reducing income tax for middle-income groups, an attempt to spur consumption and catalyze economic momentumAccording to analysts at Japan's Mizuho Bank, such measures could positively influence consumer spending, which is critical for an economy predominantly driven by domestic consumption.

However, the question on everyone's mind remains whether the Reserve Bank of India (RBI) will opt to lower interest rates during its upcoming monetary policy meetingsMany market participants anticipate a rate cut, especially considering the benchmark interest rate has been held steady at 6.5% for 11 consecutive periods

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