Trump tariff fears spook markets, Sensex cracks over 1000 points; rupee recovers on massive RBI intervention

A ruthless sell-off on Tuesday sent shockwaves through the stock market, leaving investors in small- and mid-cap stocks battered and bruised. The BSE Small Cap Index bore the brunt of the carnage, plummeting 3.40 per cent in a single day. This latest blow has pushed the total losses for small-cap stocks to a staggering 18 per cent over the past two months. Mid-cap stocks also felt the full force of the sell-off, with the BSE Mid-cap Index tumbling 2.88 per cent on Tuesday. The Mid-cap Index has now plummeted 17.61 per cent in the last eight weeks.

The relentless sell-off has wiped out thousands of crores in investor wealth, with investors and analysts wondering when the bleeding will stop. With no clear end in sight, investors are bracing themselves for further losses, as the market turmoil shows no signs of abating. Many mutual fund schemes, especially small and mid-cap funds, are sitting on huge losses with their net asset values (NAVs) plummeting in the last two months. With investors increasingly wary of potential global trade disruptions in the wake of US President Donald Trump’s tariffs, the broader market faced a rout on Tuesday with the Sensex and Nifty falling 1.32 per cent – Sensex lost 1,018 points at 76,293.60 and the Nifty by 309 points at 23,071.80.

The market is under pressure as foreign investors have pulled out Rs 1,00,000 crore since January 2025, attracted by US bond yields at 4.49 per cent and a strong dollar — exacerbated by the rupee at 87 against the dollar.  On the other hand, Trump’s 25 per cent tariff on steel and aluminium could cut US steel imports by 80 per cent, increasing global surplus risks for India.

Analysts said volatility is likely until clarity emerges on Fed policy, Trump’s tariff plans, India-US trade talks, and a domestic valuation reset. “In this scenario, large caps and gold remain safer bets, so avoid knee-jerk reactions and keep a long-term view. The recent warning by a top fund manager against investing in small- and mid-cap caps also added to the selling pressure,” said an analyst. Ajit Mishra, SVP, Research of Religare Broking, said the bigger concern is managing positions in mid-cap and small-cap stocks, which are witnessing heavy selling and appear more vulnerable. “Traders should adopt a cautious stance, prioritising risk management in the current market environment,” he said.

The ongoing uncertainty surrounding US trade policies and tariffs, coupled with domestic economic growth concerns and persistent selling by FIIs, is dampening market sentiment. The mid- and small-cap stocks experienced significant declines due to demand concerns and higher valuations. Although the RBI’s intervention provided some recovery for the rupee from Monday’s record low, it remains under pressure and is likely to keep the market volatile in the near term. Investors are anticipating the PM’s visit to the US for any potential relief in trade uncertainty, while the US inflation data later today will also be a key focus, said an analyst.

A fund manager with a leading mutual fund house recently advised caution regarding SIP investments in mid- and small-cap stocks. He said it is a clear time to take out lock, stock, and barrel from small- and mid-caps, unnerving investors. Benchmark indices extended their losing streak on Tuesday with sharp losses on weak global cues and tariff fears after Trump announced reciprocal tariffs this week itself with India likely to get hit. India is at a high risk from potential US reciprocal levies due to its pronounced tariff differentials, market analysts said.

The Reserve Bank of India intervened heavily in the foreign exchange market on Tuesday to curb speculation in the rupee and prevent a major slide against the dollar. The Indian currency recovered to 86.83 against the dollar on Tuesday from the previous day’s level of 87.48. The rupee had come close to the 88 level and touched 87.96 on Monday. According to market estimates, the central bank might have pumped around $6-10 billion to stabilise the rupee in the last two days. The RBI never discloses the magnitude of its intervention. The central bank sells dollars to strengthen the rupee and prevent any excessive volatility.

The country’s foreign exchange reserves have fallen by $51.52 billion to $630.607 billion as on February 1, 2025 from $682.130 billion as on November 1, 2024, reflecting the heavy intervention (dollar sales in the spot and forward markets) by the RBI in the forex market to curb rupee volatility. The rupee depreciated by 3.2 per cent to 87.45 against the US dollar since November 6, 2024, the day the presidential election results were announced in the US, largely mirroring the 2.4 per cent appreciation in the dollar index during the same period.