Here is an article we wrote on “Why Indian Stock Market is crashing recently”.
November 06,2023
The Indian stock market has been witnessing a sharp correction in the past few days, wiping out billions of dollars of investors’ wealth. The benchmark BSE Sensex has fallen by more than 800 points in six consecutive sessions, while the NSE Nifty has slipped below the 18,000-mark. What are the factors behind this sudden sell-off and what lies ahead for the market ?
There are several reasons that have contributed to the bearish sentiment in the Indian market. Some of them are:
- Global tensions: The escalating conflict between Israel and Hamas in the Middle East has raised concerns over the stability of the region and the impact on oil prices. The US Federal Reserve’s hawkish stance on tapering its bond-buying program has also spooked the global markets, as it signals a tightening of liquidity and a possible rise in interest rates. The 10-year yield on US Treasuries hit 5% for the first time since 2007, indicating higher borrowing costs for emerging markets like India.
- FII outflows: Foreign institutional investors (FIIs) have been net sellers of Indian equities in October, pulling out over Rs 20,000 crore so far. This is mainly due to the profit-booking by FIIs after the strong rally in the Indian market in the previous months. The weakening of the Indian rupee against the US dollar has also made Indian assets less attractive for foreign investors. The rupee has depreciated by 6 paise to trade at 83.23 against the dollar on Thursday.
- Rising inflation: The inflation rate in India has surged above the Reserve Bank of India’s (RBI) comfort zone of 4% with +/- 2%. The consumer price index (CPI) inflation rose to a 15-month high of 7.44% in July, driven by higher food and fuel prices3. This has reduced the scope for the RBI to cut interest rates further to support the economic recovery. The RBI has kept its repo rate unchanged at 4% for the third time in a row in its August monetary policy review, while maintaining an accommodative stance.
- Weak corporate earnings: The Q1FY24 results of Nifty companies have been below market expectations, with many sectors reporting a decline in revenue and profit growth due to the impact of the second wave of Covid-19. The banking, financial services and insurance (BFSI) sector, which accounts for nearly 40% of the Nifty weightage, has been hit hard by higher provisions and lower credit growth. The auto sector has also suffered from supply chain disruptions and low demand. The IT sector, which was a bright spot in Q1FY24, has seen some profit-booking after a stellar performance.
- Sectoral rotation: The market has witnessed a shift in preference from high-growth sectors like IT, pharma and FMCG to cyclical sectors like oil and gas, capital goods and metals. This is due to the expectation of a recovery in domestic and global demand, as well as a decline in commodity prices. However, this sectoral rotation has also created volatility and uncertainty in the market, as investors are constantly rebalancing their portfolios.
The outlook for the Indian market in the near term depends on how these factors play out in the coming days and weeks. While some analysts believe that this is a healthy correction and an opportunity to buy quality stocks at lower levels, others caution that the market may witness more downside before stabilizing. Investors need to be cautious and selective while investing in this volatile environment.