Unprecedented Crash

India’s stock markets fell from its never seen peak on February 06 as panic in global markets triggered a sell-off at Dalal Street with Sensex crashing 1,003 points and Nifty erasing as much as 371.4 points in the opening trades. A market-wide sell-off pattern was observed in the Indian equities as the US benchmark index Dow Jones Industrial Average tumbled as many as 1,175.21 points on February 05, posting its biggest intraday decline in history shedding nearly 1,600 points. BSE Sensex lost 1,003.38 points or 2.89% to open at 33,753.78 whereas NSE Nifty lost 371.4 points or 3.48% to begin at 10,295.15.

NSE Indicators crash

The global indicator of NSE Nifty, SGX Nifty Futures faced a knee-jerk reaction in the early trades on the day. The index plunged as many 394 points or 3.68% at 10,315.5 on the Singapore Stock Exchange on February 06, its lowest since 18 December 2017. This was the biggest intraday percentage drop since 9 November 2016. It all primarily happened as Wall Street’s biggest decline since 2011 took place and as investors’ faith in factors underpinning a bull run in markets began to crumble on February 05.

A massive slide was witnessed in every index be it a broader indicator such as Nifty Next 50 or a sectoral index like Nifty Bank. Among the broader market indices of National Stock Exchange, Nifty Next 50, Nifty 100, Nifty 200, Nifty 500, Nifty Midcap 50, Nifty Sml100 Free and Nifty Mid100 Free shed 2-4.2%. On the other hand, all of the sectoral indices of NSE traded down with Nifty Bank, Nifty Fin Service, Nifty Pvt Bank, Nifty Auto, Nifty Metal, Nifty PSU Bank and Nifty Realty losing the most.

BSE indicators Crash

All the shares of BSE Sensex index were trading in red with stock of Tata Motors, Yes Bank, Axis Bank, Tata Steel, ICICI Bank, State Bank of India, Adani Ports, Asian Paints, HDFC Bank, Maruti Suzuki, Hero MotoCorp, L&T, HUL, IndusInd Bank, Kotak Mahindra Bank, HDFC, Coal India, ONGC, ITC, Dr Reddy’s, NTPC, Sun Pharma, Power Grid, M&M, Reliance Industries, Bajaj Auto, Infosys, Wipro, TCS and Bharti Airtel lost 1-8%. The heavyweight shares of companies such as HDFC Bank, HDFC, ICICI Bank, ITC, Reliance Industries, L&T, Tata Motors, Infosys, Axis Bank, Maruti Suzuki, SBI, Kotak Mahindra Bank, HUL, TCS, Yes Bank, IndusInd Bank and M&M contributed heavily in the Sensex declines. Collectively these 17 shares wiped off as much as 890 points out of the index.

The US Stock Market Crash and ripple Effects on Indian Market

The Indian stock market recorded unprecedented jolt on the back of decline in US capital market indices. Although some indications appeared even yesterday, yet today the decline was deeper and wider in the Indian stock markets. Indian stock markets finished lower on January 05 with the headline indices Sensex and Nifty closing in red for the fifth straight day following the global sell-off in equity markets. BSE Sensex fell as much 309.59 points or 0.88% to end at 34,757.16 and NSE Nifty washed off 94.05 points or 0.87% to settle at 10,666.55. US stocks plunged in highly volatile trading on January 05, with both the S&P 500 and Dow Industrials indices slumping more than 4.0% as the Dow Jones notched its biggest intraday decline in history with a nearly 1,600-point drop and Wall Street erased its gains for the year, Reuters said in a report. The slumps in the benchmark S&P 500 index and the Dow Jones Industrial Average were the biggest single-day percentage drops since August 2011, a period of stock-market volatility marked by the downgrade of the United States’ credit rating and the euro-zone debt crisis.

The Dow Jones Industrial Average fell 1,175.21 points or 4.6% to 24,345.75, the S&P 500 lost 113.19 points or 4.1% to 2,648.94 and the Nasdaq Composite dropped 273.42 points or 3.78% to 6,967.53. On Monday, the S&P 500 ended 7.8% down from its record high achieved on 26 January 2018, with the Dow down 8.5% over that time. The declines come after the Dow and S&P posted their biggest weekly percentage drops since January 2016 last week, and the Nasdaq posted its biggest weekly drop since February 2016. At one point, the Dow fell 6.3 percent or 1,597 points, the biggest one-day points’ loss ever. Even with the sharp declines, stocks finished above their lows touched during the session.

Reasons for crash

  1. Finance Secretary Hasmukh Adhia has pointed fingers to the global markets. “It is very unfortunate that our move came in at wrong time because of global markets also going down. There is a strong connection of all equity markets. The MSCI all country index of equity markets went down by 3.4 per cent in last week, especially on February 1, and February 02. He added, “If the entire world index has gone down by 3.4 per cent, naturally it would have ripple effect on Indian stock market also. It is not LTCG tax effect.”
  2. The indications from the U.S Federal Reserve, that country’s central bank might hike the benchmark interest rates, despite keeping the rates unchanged recently at the last meeting chaired by Janet Yellen. The interest rates are the rates at which the Reserve lends money to the other banks. A jump in the interest rate means that banks may hike interest rates themselves, passing the cost on to the customers. This will make loans and credit cards costlier, affecting companies’ financial performance as they have to pay more as interest costs, while also slowing down investment and expansion.
  3. Higher interest rates also affect stock markets indirectly by reducing consumer spending. The higher rates generally encourage more savings and less borrowing in the economy, which leads to a dip in consumption and lower revenues for companies. Since share prices are directly influenced by how companies perform financially, higher interest rates are generally badly received by stock markets.
  4. A course correction was due both in the US and India. This sudden fall in the markets can also be due to the fact that stock prices have been steadily rising — a nine-year bull run. “The U.S. stock market has climbed to record peaks since President Donald Trump’s election, on the prospect of tax cuts, corporate deregulation and infrastructure spending, and it remains up 23.8 per cent since his victory. A course correction is usually started by a sell off. In this case, the trigger was the rise in U.S. bond yields and the rate of increase of U.S. wages, which in turn “raised an alarm about higher inflation and potentially higher interest rates. In India despite twin balance sheet problem, poor industrial growth, farmers suicide and unemployment share prices in recent times had risen to record highs.
  5. Another proximate reason in case of crash of the Indian stock market is proposal of tax on Long Term Capital Gains (LTCG). In the Indian markets, the decline may also be due to last week’s budget proposal of 10 per cent long-term capital gains (LTCG) tax on equities. LTCG or long-term capital gains refer to the gains made on any class of asset held for a particular period of time. In case of equity shares, it refers to the gains made on stocks held for more than one year.
  6. The inflationary expectations leading to a possible increase in the RBI repo rate to avert fears of inflation might also be one of the reasons.

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