Indian equity markets witnessed a sharp selloff on Friday, with the Sensex plunging more than 1,000 points and nearly Rs 5 lakh crore being wiped off investor wealth, as worries over a weak monsoon forecast, continued foreign investor selling and uncertainty around a US-Iran peace deal rattled sentiment.
The Sensex closed 1,092.26 points lower at 74,775.74, while the Nifty50 dropped 359 points to settle at 23,547.75. Market volatility surged, with India VIX rising around 9 per cent to 16.35.
Power Grid emerged as the biggest loser on the Sensex, falling more than 4 per cent. IndiGo dropped over 3 per cent ahead of its quarterly results, while Bajaj Finance, UltraTech Cement, Tata Steel, Sun Pharma and NTPC declined more than 2 per cent each. Tech Mahindra and HCLTech bucked the trend and gained nearly 2 per cent.
Here are the key reason for the stock market crash:
MSCI rebalancing triggers late-hour volatility
Traders pointed to the MSCI May 2026 index rebalancing as a key reason behind the sharp selloff in the final phase of trading. The MSCI rejig took effect during the closing trade. Four Indian stocks, including MCX and Indian Bank, were added to the MSCI Standard Index, while stocks such as RVNL and Kalyan Jewellers were removed. Around a dozen stocks were also excluded from the MSCI Small Cap Index, leading to significant passive fund adjustments and elevated trading volumes in the final minutes of the session.
"The sudden spike in volatility was largely attributed to the MSCI May 2026 index rebalancing, which triggered heavy passive institutional flows during the closing session," he added.
"Markets witnessed a sharp bout of volatility in the final hour of trade on Friday, with benchmark indices erasing most of their intraday gains amid heavy selling. After a steady start, the Nifty traded within a narrow range for most of the session; however, intense selling pressure emerged during the final 30 minutes, dragging the index sharply lower before a partial recovery at the close," said Ajit Mishra, SVP-Research, Religare Broking Ltd, PTI quoted him as saying.
IMD's weak monsoon forecast sparks inflation concerns
A key trigger for Friday's selloff was the India Meteorological Department's forecast of below-normal rainfall during the June-September monsoon season.
"Monsoon rainfall from June to September will be 'below normal' and is likely to be 90% of the long-period average," M Ravichandran, secretary at the Ministry of Earth Sciences, said while announcing the forecast. LPA (Long Period Average) refers to the long-term normal rainfall for a region, derived by averaging rainfall data for a specific time period over several decades typically 30–50 years.
The projection, which points to the weakest monsoon outlook in 11 years, has raised concerns about food inflation and rural demand, particularly as El Niño conditions continue to influence weather patterns.
"The market witnessed broad-based selling pressure following the IMD's monsoon forecasts to 90% of the long-period average (LPA), raising concerns among investors," said Vinod Nair, Head of Research at Geojit Investments.
"The prospect of deficient rainfall, coupled with the increasing likelihood of an El Niño weather pattern, has heightened fears of elevated food inflation in the coming months," he added.
US-Iran peace deal remains uncertain
Investors also remained cautious amid uncertainty surrounding efforts to convert the current US-Iran ceasefire into a broader peace agreement.
Reports suggested that Washington and Tehran have agreed to extend the ceasefire for 60 days, although the arrangement still awaits approval from US President Donald Trump.
US Vice President JD Vance said negotiators were "very close" to a peace deal but were still "going back and forth on a couple of language points", including the "question of enrichment".
"Geopolitical uncertainty also continued to weigh on investor confidence. Although initial optimism emerged around a possible extension of the US-Iran ceasefire arrangement, the absence of formal confirmation from Washington kept global institutional investors cautious ahead of the weekend, limiting aggressive risk-taking across equities," Hariprasad K, Research Analyst and Founder, Livelong Wealth, said, as quoted PTI.
The lack of clarity over a final agreement has kept geopolitical concerns alive in global markets.
Foreign investors continue to sell Indian equities
Persistent selling by foreign institutional investors also weighed on market sentiment.
According to provisional NSE data, foreign investors sold Indian equities worth Rs 1,043 crore on Wednesday. FIIs have remained net sellers in 13 of the 18 trading sessions so far in May.
The continued outflows have added pressure on domestic markets despite relatively strong corporate earnings.
Sectors under pressure
The weakness extended beyond frontline indices. The Nifty Smallcap 100 and Nifty Midcap 100 indices fell around 1 per cent each.
Among sectors, Nifty Oil & Gas declined around 2.5 per cent while Nifty Metal dropped more than 2 per cent. Nifty IT was the only major sectoral index to end marginally higher.
What next?
Despite the sharp correction, analysts pointed to encouraging earnings trends and easing oil prices.
"A positive trend from the market perspective is that Q4 results have been better-than-expected. The double-digit earnings growth in financials, automobiles and metals is impressive. Trends indicate that FY27 will be good for defence, capital goods, renewable energy, financials and pharmaceuticals. Growth sectors like digital platform companies are getting accumulated on declines," said VK Vijayakumar of Geojit Investments, ET quoted.
Meanwhile, Brent crude futures fell nearly 2 per cent to below $92 per barrel, while WTI crude futures declined around 2 per cent to trade near $87 per barrel.
The rupee also strengthened, rising 53 paise to close at 95.05 against the US dollar from 95.69 in the previous session. According to a Reuters report citing traders, the Reserve Bank of India likely intervened in the foreign exchange market ahead of Friday's opening to support the domestic currency.
(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India)Ready to Make a Smarter Property Decision? Build Your Legacy with TOI Homes.
Follow Us On Social Media