Indian stock market crashed today as Sensex, Nifty, and small and mid-cap stocks (SMIDs) took the hit. Investors faced significant losses as the important indices plummeted, creating doubts about short-term stability in the market.
But why the sudden drop? Global leads, domestic economic metrics, or profit taking? In this article today, we shall talk about the top reasons that led to the crash in the markets and what investors can expect in the near future.
1. Global Market Volatility & Weak Cues
One of the main reasons for the present downtrend in the stock market is that global markets are weak. U.S., European, and Asian indices are facing selling pressure on account of some countries, some of the reasons being:
a) Interest Rate Policy of U.S. Federal Reserve
The U.S. Federal Reserve has indicated that it will support higher interest rates for longer periods of time, thereby leading to capital flight from emerging economies like India.
Increased interest rates in the U.S. lower the attractiveness for risky instruments like equities, and accordingly foreign institutional investors (FIIs) withdraw money from the Indian economy.
b) Geopolitical Tensions
Rising geopolitical tensions in Russia-Ukraine and war in the Middle East have made investors nervous.
Any spillover would impact world crude oil prices, supply chains, and overall market sentiment.
c) Poor Performance of US Tech Stocks
Top US technology stocks facing intense selling pressure on account of weak earnings performance and valuation concerns.
Given the Indian market’s tendency to mirror world tech performance, the negative sentiment percolated to local indices.
2. Large Foreign Institutional Investor (FII) Flows
Foreign Institutional Investors (FIIs) have been net sellers of the Indian market in the past few weeks, and today was no exception either. The reasons being:
✔️ Higher U.S. bond yields leading to foreign investment in safe assets to a larger extent.
✔️ Apprehension of overvaluation of India in small- and mid-cap stocks leading to profit booking by FIIs.
✔️ Weakness in the U.S. dollar, raising the risk for emerging markets.
When FIIs exit the Indian market, they put pressure on benchmark indices like Sensex and Nifty downwards.
3. Profit Booking in Small & Mid-Cap Stocks (SMIDs)
The space of small and mid-cap stocks (SMIDs) witnessed one of the biggest falls of the day. Several investors were scooping up these counters as they saw good growth potential in them, but fear of overbought prices induced huge selling.
Why were the SMIDs down disproportionately to the large-caps?
Overbought valuations: A few of the stocks in this group had been going up strongly and therefore susceptible to steep falls.
Institutional selling: Mutual funds and large investors sold, adding to the down pressure.
Retail panic selling: Retailers also followed as FIIs sold, perpetuating the down trend.
4. Fears of Inflation & Rising Crude Oil Prices
Prices of crude oil have fluctuated in the past few weeks mostly due to:
Disruptions in oil-producing countries’ supply chains.
OPEC+ production cuts, leading to diminished global supply.
Since India is a net importer of petroleum products, higher prices adversely affect company profitability and inflation too. Higher inflation also has an impact on consumer expenditure and corporate bottom lines, which means poor stocks.
5. Weak Corporate Performance & Sectoral Weakness
Some top industries’ recent corporate earnings releases disappointed investors, triggering a widespread selling spree. Some of the sectors impacted are:
a) Banking & Financial Sector
A few banks reported lower-than-anticipated net interest margins (NIMs).
Increase in bad loans (NPAs) in some segments spooked investors.
b) IT & Technology Stocks
India’s IT services exports were hit by global tech slowdown, triggering weak earnings guidance.
Strong dollar impacted firms that earn revenues in foreign currencies.
c) Auto & FMCG Sectors
Higher input costs and subdued rural demand impacted auto and FMCG companies.
Firms reported slower recovery in demand, further weakening investor sentiment.
6. RBI’s Cautious Stance on Interest Rates
Reserve Bank of India (RBI) has taken a prudent approach towards interest rates for taming inflation. Sustaining issues are:
Sustained core inflation in food and fuel.
Depreciation of the rupee, higher import expenses.
Disappointing GDP growth estimates impacting the economic outlook.
A hawkish RBI will mean interest rates not decreasing anytime soon in the near term, impacting business and consumer liquidity and cost of borrowing.
7. Market Sentiment & Fear of Further Corrections
Finally, negative sentiment in itself was the only reason for today’s market decline. Traders and investors panicked due to:
Computerized stop-loss selling triggering further declines.
Margin call anxiety causing leveraged positions to be squared off.
Panic selling by consumers putting more-than-usual selling pressure.
If a market correction starts, panic selling can cause the fall, even irrespective of fundamentals.
What to Do Now as an Investor?
✔️ Stay Calm & Avoid Panic Selling: Market corrections are normal, and emotional reactions can lead to Sensex losses.
✔️ Keep an Eye on the Fundamentals: Invest in quality fundamental stocks available at depressed valuations.
✔️ Diversify: Spread investments in sectors and asset classes to avoid risks.
✔️ Follow Global & Domestic Trends: Keep a track of U.S. Fed, RBI, and geopolitical trends.
✔️ Capitalize on Sensex Market Downturns: Long-term investors can capitalize on purchasing good shares at low levels.
Conclusion: Short-Term Correction or Something More?
While the market crash of today was sudden, it is important to see whether this is a short-term correction or maybe an indication of something deeper. The coming few weeks will be crucial in deciding:
- Will FIIs halt selling, or will they return?
- What will corporate earnings do in the next quarter?
- Will crude oil stabilize?
- What will be the next action of U.S. Fed and RBI?
Until then, investors should be careful but not nervous. Bounces in the market are a given in any investment, and those continuing to hold quality stock generally fare better in the long run.
Is it a short-term pullback, or do we venture into a bear Sensex market? Let me know what you think in the comments!???????
Read More: Why Did the Sensex Crash 1,000 Points Today?
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