New Delhi, Feb. 20 -- India's stock markets have taken a beating, the BSE Sensex having come down by more than 10,000 points from its peak last September. The broader market has fared worse, as the sharpest slide was in small-cap stocks, less severe in mid-caps and relatively modest among big companies.

While weakening market indices disappoint millions of investors, especially those who joined the action in recent years, this is not a disaster. It reflects neither a fundamental problem with our economy, nor any structural flaw in capital markets.

Rather, this correction represents the squeezing out of excess.

Four factors had conspired to inflate equity prices: one, an influx of external liquidity arising from easy-money policies aime...