Eve watched stock market news during market open hours? If yes, you might have seen dynamically changing numbers on screen and a mix of green and red colours changing rapidly through the time.
So, what’s the big deal here? Why are SENSEX and Nifty falling so much in a single day?
Should we be concerned?
When the market benchmarks, the SENSEX and Nifty, experience a significant decline in a single trading day, it can trigger widespread concern among investors.
Let us unravel the mechanics of stock market operations, the reasons behind such dramatic plunges, and provide historical context to these volatile movements.
Understanding the Stock Market
At its core, a stock market can represent a marketplace where buyers and sellers trade in financial instruments, primarily shares of publicly listed companies.
In India, the two dominant stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
These exchanges facilitate the process of raising capital for businesses and provide opportunities for investors to participate in the growth of these companies.
How the Stock Market Operates
The operation of the stock market hinges on the fundamental principles of supply and demand.
If many investors wish to buy a particular stock, its price generally rises. Conversely, if numerous investors seek to sell a stock, its price tends to fall. Stockbrokers act as intermediaries, executing buy and sell orders on behalf of their clients. This entire process occurs with remarkable speed, with exchanges matching buyers and sellers and confirming transactions within seconds.
The Securities and Exchange Board of India (SEBI) oversees this intricate system, ensuring transparency and protecting investor interests. The movement of the SENSEX and Nifty, which are benchmark indices, reflects the collective performance of a select group of companies listed on these exchanges.
Companies initially list their shares on the market through an Initial Public Offering (IPO) in what is known as the primary market. Once these shares are publicly available, they are then traded among investors in the secondary market. Factors like a company’s financial health, economic indicators, and market sentiment all play a crucial role in determining share prices.
Rise and Plunges in the Stock Market
Stock markets are inherently volatile, experiencing periods of both ascent and descent. A “market rally” signifies a period of sustained price increases across a broad range of stocks, often driven by positive economic news, strong corporate earnings, or investor optimism. Conversely, a “market plunge” refers to a sharp and sudden decline in stock prices.
Several factors can contribute to a significant single-day fall in the SENSEX and Nifty. These can be broadly categorised into the following domestic and global triggers:
1. Economic Indicators
High inflation often prompts central banks, like the Reserve Bank of India (RBI), to increase interest rates. Higher interest rates make borrowing more expensive for companies, impacting their profitability and growth prospects. Reduced consumer spending due to inflation also hurts sectors like FMCG and automobiles. Conversely, lower interest rates can stimulate borrowing and investment, leading to market rallies.
2. Political Environment and Policy Uncertainty
Political instability, unexpected changes in government policies, or even general election results can create uncertainty. For instance, the announcement of demonetisation in 2016 initially caused significant market turbulence. Predictability is a key desire for markets, and any deviation can trigger a sell-off.
3. Corporate Earnings
Weak corporate earnings or missed profit estimates by major companies can lead to a broad market decline. When companies underperform, their stock prices drop, pulling down the indices.
4. Foreign Institutional Investor (FII) Activity
Foreign investors play a substantial role in the Indian market. Significant outflows of foreign capital, often driven by global uncertainties or more attractive investment opportunities elsewhere, can put considerable downward pressure on the SENSEX and Nifty.
5. Global Events
The Indian stock market is highly interconnected with global financial markets. Major international events such as a global financial crisis, geopolitical tensions, trade wars, or even pandemics can trigger widespread panic selling across borders, directly impacting Indian indices. For example, a recession in the US or a crisis in a major economy can lead to foreign investors pulling out funds from emerging markets like India.
6. Market Bubbles and Corrections
Sometimes, certain sectors or the entire market can become overvalued, forming a “bubble.” When this bubble bursts, often due to a lack of underlying fundamentals to support the inflated prices, a sharp correction or plunge occurs.
Historical Examples of SENSEX and Nifty Falls
The Indian market has witnessed several significant single-day falls in the SENSEX and Nifty throughout its history:
1. The Harshad Mehta Scam (1992)
The exposure of this massive scam led to a dramatic fall. On April 29, 1992, the Sensex plunged by 570 points, a staggering 12.77% at that time, as investor confidence eroded. This event prompted crucial reforms and strengthened SEBI’s regulatory powers.
2. The Global Financial Crisis (2008)
Following the collapse of Lehman Brothers in the US, global markets reeled. On January 21, 2008, the Sensex experienced a significant single-day drop of 1,408 points, representing a 7.4% decline, due to fears of a global recession and mass selling by FIIs. The SENSEX recovered by 2010.
3. COVID-19 Pandemic (2020)
The announcement of a nationwide lockdown in India amidst the global pandemic triggered the most severe single-day crash in Indian stock market history. On March 23, 2020, the Sensex plummeted by 3,935 points, a 13.15% fall, while the Nifty dropped by 1,135 points, marking a 13% decline. Despite the initial shock, the Nifty witnessed a remarkable 140% rally by late 2021.
Wrapping Up
A sudden fall in the SENSEX and Nifty, while unsettling, is an inherent characteristic of dynamic financial markets. Understanding the underlying causes of these plunges can help investors to adopt a more informed and less reactive approach. While short-term volatility remains inevitable, the long-term trajectory of the Indian market has historically shown resilience and growth. Staying informed by reading Kuvera blogs, diversifying investments, and focusing on long-term financial goals are crucial strategies for navigating the ever-evolving landscape of the SENSEX and Nifty.
Interested in how we think about the markets?
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