Sensex Down Over 1,000 Points, Nifty at Three-Month Low: What Triggered Sell-off in Indian Market?

The pain in the broader market has been much worse. Midcap and smallcap stocks have fallen more sharply, as traders are quickly reducing risk and squaring off positions.

Sensex Falls Over 1,000 Points and Nifty Records Sharpest Fall Since May 13, 2025

On January 20, the Sensex closed near 82,200, down 1.3%, while the Nifty dipped below 25,250. As a result, the index extended its fall witnessed on January 19, 2026.  

On Monday, January 2026: 

• Sensex crashed over 1,000 points
• Nifty fell over 1%, recording its sharpest single-day fall since May 13, 2025. 
• Nifty Midcap 100 & Smallcap 100 indices tanked over 2.5%

The weakness was broad-based, with Realty, IT, Financials, Consumer Durables, and PSU Banks all trading in the red, signalling that this was not just sector-specific profit booking, but a sentiment-driven risk-off event.

5 Key Reasons for the Sharp Sell-Off in Indian Markets

1. Trade-War Concerns Resurface

One of the most defining triggers for the recent market weakness has been the renewed talk of a potential trade war involving the United States and several European nations, over the issue of Greenland. 

Recent remarks from US President Donald Trump, who suggested imposing tariffs on European countries for opposing his plans regarding Greenland, have spooked global markets. The president said that unless Denmark, Norway, Sweden, the UK, France, Germany, the Netherlands and Finland agree to let him seize Greenland, a 10% tariff on all goods they ship to the US will start from February 1 and jump to 25% from June 1, 2026 onwards.

European leaders are reportedly evaluating countermeasures, raising fears of a tit-for-tat tariff cycle. In financial markets, uncertainty is often worse than bad news. The idea that two major economic blocs may begin imposing fresh tariffs at a time when global growth is already fragile is enough to trigger a risk-off sentiment. This explains why safe-haven assets such as gold and silver have been rising, while equities across Asia, Europe and even US futures have reacted negatively.

2. Selling by FIIs 

Foreign institutional investors (FIIs) have been persistent sellers in Indian equities since the beginning of January, and this selling pressure has accelerated at a time when global risk appetite is weakening. FIIs have offloaded well over ₹29,000 crore this month alone, which is not a small figure considering the domestic market was already trading at rich valuations at the start of the year. When foreign funds pull out capital, especially from emerging markets like India, the impact shows up immediately in the indices and the currency.

Several reasons appear to be contributing to this outflow: the weakening Indian Rupee, geopolitical tensions involving the US, uncertainties around global trade agreements, and a mismatch between stock valuations and earnings growth. When valuation expectations get stretched and risks increase simultaneously, foreign investors typically reduce exposure rather than add fresh money. This pattern was visible throughout 2025 as well, and the momentum has spilled into the new year.

3. Muted Q3 Earnings So Far

The earnings season has not been disastrous, but it has certainly failed to lift market mood. Early third-quarter (Q3FY26) results have shown single-digit growth in revenue and limited expansion in profitability. Several sectors (particularly IT) have given conservative guidance for the coming quarters. Wipro’s weaker-than-anticipated outlook earlier this week reaffirmed that the IT industry is still dealing with global demand uncertainty, despite decent order pipelines.

More broadly, earnings growth expectations were already high entering 2026, and reality has so far lagged those expectations. Investors typically tolerate bold valuations as long as earnings deliver positive surprises. But when data points do not excite, especially during a period of global tension and currency volatility, markets tend to correct. Investors expect better numbers once auto and BFSI earnings flow in, but until those results arrive, equity sentiment is likely to remain cautious.

4. Risk-Off Mood and Flight to Safe Havens

The current market environment is a classic example of a “risk-off” scenario, where investors prefer safety over growth. Gold and silver have rallied sharply, indicating that capital is moving into assets perceived as safe during turbulent times. This is not exclusive to India, globally, investors are cutting equity exposure, moving into US Treasury bonds, and parking money in dollar-denominated instruments. When safe-haven demand increases, equities automatically bear the brunt.

Even the India VIX, a barometer of fear, jumped above the 12.5 mark during the session, suggesting growing nervousness. Domestic traders, who had built leveraged positions in midcaps and smallcaps during the rally, are now unwinding those bets, adding fuel to the broader sell-off. As a result, indices like the Nifty Midcap 100 and Smallcap 100 have underperformed more noticeably than the benchmark indices.

5. Budget 2026 Adds to Caution

Another layer of uncertainty comes from the fact that Union Budget 2026 is just around the corner. Markets generally turn cautious ahead of Budget announcements, especially when valuations are elevated and expectations are high. This year,  the Budget is likely to try to balance economic growth with fiscal discipline. The concern is that an aggressive push for fiscal consolidation might lead to slower government spending, which could weigh on infrastructure, rural consumption, and manufacturing activity.

Investors are also curious about potential changes in taxation, consumer-focused incentives, MSME support schemes, and job creation measures. High expectations create nervousness, because any deviation from those expectations can trigger volatility. Until the Budget narrative becomes clearer, traders are likely to reduce risk rather than increase it.

Conclusion

What we are witnessing now is a textbook example of a global risk-off phase that has been magnified by local triggers. The Greenland tariff saga may appear strange on the surface, but markets are driven by uncertainty, not by how logical the news headlines sound. Add to that aggressive FII selling, subdued early Q3 earnings, and Budget-related caution, and a corrective phase is almost inevitable. Corrections like these have happened countless times before and will happen again.