The sensex had a massive reaction to the 2024 election results. Initially, the market index experienced a crash, dropping by almost 6% as the election results indicated that the National Democratic Alliance (NDA) led by PM Narendra Modi did not achieve a simple majority in the Lok Sabha. This outcome was contrary to the predictions made by exit polls, which caused uncertainty and panic among investors.
However, the Sensex made a strong recovery. Within three days, the Sensex not only recaptured the losses from the election result day but also made new record highs. The benchmark index jumped 1720.8 points to hit a record peak of 76,795.31 in a single-day trade. This marked a significant milestone with the Sensex soaring by over 1,720 points i.e., over 2% to reach lifetime intra-day record highs. Plus the Reserve Bank of India’s decision to revise the GDP growth projection to 7.2% for 2024-25 from 7% earlier, contributed to the positive momentum in the stock market.
What is a Financial Crisis?
A financial crisis is a case where the value of your assets decreases up to a point that investors panic and start selling their stocks. If a majority of investors start following the trend, prices fall drastically and markets crash. Hence, indices are impacted.
Suppose you invested ₹10,000 in the stock market last week. A day after you invested, its value became ₹9,500. And today, its value plummeted to ₹6,000. So you panic and sell your share in the hopes of not losing any more money. When this is practised by many investors simultaneously, market indices such as NIFTY 50 and Sensex change drastically.
There have been significant crashes throughout history. Let us delve into some of the major market crashes in India.
India's stock market benchmarks recorded their steepest drop in 4 years as Lok Sabha election outcomes rattled investors. The BSE Sensex tumbled 5.7%. Take a look at its biggest single-day declines since 2000, and the underlying causes.#ChartOfTheDay pic.twitter.com/WeC0VTAGcE
— Kuvera (@Kuvera_In) June 5, 2024
Harshad Mehta Scam- 6th August 1992
The Harshad Mehta scam, also known as the Securities Scam of 1992, was one of the biggest financial scandals in the history of the Indian stock market. Harshad Mehta, a stockbroker, managed to take over ₹4000 crore from different banks. He used this money to buy large quantities of shares, artificially inflating stock prices. The scam came to light when the State Bank of India (SBI) reported a sharp decrease in government securities, revealing a massive fraud.
On August 6, 1992, when the scam was exposed, the Sensex plummeted by over 50%. The drop did not happen overnight but stretched across the year, making it a painful decline for investors. Due to the scam, there was a bear market for almost two years.
Dotcom Bust of 2000
This was driven by the quick speculation in internet-based companies, prevalent from roughly 1995 to 2000. During this period, the market saw a surge in valuations of companies with a “.com” suffix in their domain names.
The Dotcom Bubble started with the advent of the World Wide Web in 1989, followed by the increase of internet-based startups throughout the 1990s. This hype saw a dramatic increase in stock prices for these companies, driven largely by speculative investments rather than solid financial fundamentals.
It had a global ripple effect, including significant consequences for Indian financial markets. Tech stocks within the NIFTY 50 saw speculative gains driven by investor enthusiasm for the internet sector. However, the burst led to a huge decline in tech stock values.
NDA Loss- 17th May 2004
In the 2004 general elections in India, the ruling BJP-led NDA government was defeated by the then opposition party Congress. This potential instability resulted in a sharp decline in the markets. Ultimately, the formation of the UPA government under Manmohan Singh’s leadership paved the way for continued economic reforms and stability, leading to improved investor confidence in the Indian markets.
Global Financial Crisis of 2008
The financial crisis of 2008, often referred to as “The Great Recession,” was one of the most severe financial downturns since the Great Depression. This crisis can be traced to the bursting of the housing market bubble in the United States of America and it had a huge repercussion on the global financial markets.
So, banks and other financial institutions issued many subprime mortgages (loans to borrowers with poor credit) at low interest rates. These mortgages were bundled into financial instruments and sold to investors. These instruments were mistakenly considered low-risk because they were backed by Credit Default Swaps (CDS).
CDSs are financial tools that allow you to protect yourself in case your borrower doesn’t repay their debt. If there is a default, you get a payment from the bank. These swaps are commonly used by investors to reduce the risk of default or by lenders for protection against potential losses.
As housing prices began to decline in the USA, many homeowners defaulted on their loans. The high rate of defaults led to a collapse in the value of the mortgage-backed securities, causing major liquidity issues for financial institutions heavily invested in these securities.
Major financial institutions faced insolvency and were either bailed out by governments or went bankrupt like the Lehman Brothers. This created a cascading effect, leading to a crisis in the financial markets. As the crisis unfolded, NIFTY 50 experienced a sharp decline. By late 2008, the NIFTY 50 had fallen by approximately 50% from its peak levels.
Satyam Scam- 7th January 2009
The Satyam scam was a major scandal that took place in 2009 involving Satyam Computer Services. Satyam’s promoter and chairman, B Ramalinga Raju, admitted to an extensive falsification in the company’s balance sheet. The company’s cash and bank balances were overstated by ₹5040 crore, as against the ₹5361 crore shown in the books.
This news triggered a massive sell-off as investors lost confidence in the company and feared similar issues in other firms. The Bombay Stock Exchange’s Sensex plummeted by 6.6% in one day.
COVID-19
From the start of 2020, panic struck the market by the spread of COVID-19. This led to a massive sell-off in markets. Foreign Portfolio Investors (FPIs) withdrew around ₹55,007 crore approximately $7.4 billion from the Indian equity market in March 2020. Market indices faced a global sentiment shift towards risk aversion, leading to the withdrawal of investments. On 23rd March 2020 when a nationwide lockdown was announced, BSE Sensex fell by 13.2%.
2024 Election Result
The Lok Sabha Election Results in 2024 had a huge impact on the Indian financial markets, particularly the NIFTY 50 and the BSE Sensex indices. Here’s a detailed analysis:
The BJP-led NDA was expected to win a majority according to exit polls. However, the actual results showed that, BJP failed to win even 50% of the seats. Hence, the difference between the exit polls and the actual results led to a negative reaction in the stock markets. Investors were concerned about the stability and future policy direction of a government with a reduced majority.
Despite the volatile nature of equity markets, it is seen that investment strategies in the long term, work. The recovery after such market crashes shows the potential for rebounding from even the most severe financial crises.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Watch here: Expert Insights for Smart Investing
Start investing through a platform that brings goal planning and investing to your fingertips. Visit kuvera.in to discover Direct Plans and Fixed Deposits and start investing today.
