Global investors' enthusiasm for the Indian stock market is waning.

Today, the Mumbai Sensex index fell sharply by 1.86% at one point, eventually closing down by 1.18%, marking the third consecutive trading day of closing in the green.

The Indian Nifty index widened its decline to 2% intraday, marking the largest drop since October 3.

The Indian rupee against the US dollar exchange rate has dropped to near historic lows, now standing at 0.1188.

Foreign ownership of stocks has dropped to the lowest level in 12 years.

According to the Financial Times of the United Kingdom, in October, foreign investors pulled out over $10 billion from the Indian stock market, marking the largest monthly outflow since the beginning of the COVID-19 pandemic, as concerns grow over a potential end to the market's bull run due to India's economic slowdown.

According to data from the stock exchange, following the outflow in October, foreign investors' net inflow into the Indian stock market this year has dropped to only $2 billion.

Despite funds still flowing in earlier this year, the foreign holdings in the Indian stock market have dropped to the lowest level in 12 years.

While foreign funds are being sold off, domestic capital in India is continuously being invested.

According to JPMorgan research report data, in October, Indian domestic institutional investors (DIIs) maintained a net purchase for 14 consecutive months, with an inflow of $12.8 billion in October, reaching a historical monthly record far exceeding September's $3.8 billion.

In addition,Mutual fundsWith a net purchase of $10.4 billion in October, compared to $3.9 billion in September; insurance funds bought $2.4 billion worth of stocks, while selling $0.1 billion in September.

Indian retail investors also bought $2.8 billion worth of stocks in October, showing significant shareholding compared to a net sell-off of $1 billion in September.

Urgent measures need to be taken.

Investors are increasingly concerned that the Indian stock market, which has more than doubled since March 2020, may now be in trouble due to signs of weak corporate profits, economic slowdown, and measures by the central bank to curb excessive retail loan expansion.

Data from August shows that India's GDP grew by 6.7% in the second quarter, the lowest level in five quarters, which is a warning signal.

In response to this, Nomura economists stated last month that India's 'growth prospects seem to be only half left.'

Saurabh Mukherjea, Chief Investment Officer at Marcellus Investment Managers in Mumbai, said: 'This is a fairly typical cyclic economic recession in India. The question is, is this a situation that will last for several quarters or a more persistent one?'

Mukherjea revealed that he has been buying defensive stocks in sectors such as information technology and pharmaceuticals, believing that these stocks will perform well during the 'uncertain period.'

In addition to India's weak fundamentals, investors are selling Indian stocks to cope with the volatility before and after the US election, and are redirecting funds to the recent rebound in Chinese stocks.

Affected by the sell-off, after hitting a series of historical highs earlier this year, the Indian Nifty 50 index fell by 6.2% in October, while the Sensex index fell by 5.8%, marking the worst performance since March 2020.

Despite some decline, the Indian stock market is still relatively overvalued. The expected PE ratio of the MSCI India Index is 24 times, slightly higher than the approximately 23 times of the S&P 500 index.

Goldman Sachs believes that soft earnings reports across various industries in India have led to the stock market decline. Goldman Sachs analysts have downgraded their rating on the Indian stock market from 'shareholding' to 'neutral'.

UBS Group's Chief Emerging Markets Strategist Sunil Tirumalai also stated: 'We track the extent of earnings downgrades, and the situation seen in India is quite severe, with even (some) essential consumer goods earnings data falling below expectations.'

Facing the current dilemma, Mukherjea from Marcellus believes that much now depends on whether the Indian authorities take action to prevent a potential multi-year economic downturn.

Although the Reserve Bank of India has expressed its willingness to lower the key policy rate of 6.5%, Governor Shaktikanta Das stated that the risks of rate cuts are currently too high.

Mukherjea stated, with the inflation rate close to 6%, the Reserve Bank of India "faces a difficult decision, but I believe they need to start cutting interest rates early".

He also added: "As long as appropriate monetary and fiscal measures are taken, we should overcome the situation by Christmas 2025."