EXPLAINED | Key Factors That Are Pulling Down Indian Stock Market

Investors lost about Rs 5 lakh crore in the first 15 minutes of Friday’s trade; investor wealth dipped to Rs 254.52 lakh crore on Friday against Rs 259.64 lakh crore in the previous session

The ongoing Russian-Ukraine conflict is one of the key reasons for the downfall of equity markets across the globe, including India. Image: Getty

New Delhi: It has become a routine for the Indian stock market to decline sharply at regular intervals as the bears are in full control. The key domestic equity benchmarks, Sensex and Nifty, saw another plunge on Friday when the 30-share BSE Sensex tanked 1,115 points to touch day’s lowest level at 54,587, while the broader NSE Nifty slipped 342 points to hit 16,341.

According to the BSE, investors lost about Rs 5 lakh crore in the first 15 minutes of Friday’s trade. Investor wealth dipped to Rs 254.52 lakh crore on Friday against Rs 259.64 lakh crore in the previous session.

During the intra-day trade, both the indices have recouped some of the losses, however, an all-out selling across the board is making matters worse.

If we are to compare the current market situation with last year, we will notice a stark contrast. The Nifty50 had gone up all the way to touch 18,500 in October 2021. It has been around 7 months now. Since then it hasn’t crossed that mark.

The VIX (volatility index) is rising and gaining strength with each and every passing day.

So, what is plaguing the Indian stock market continuously? Here are some of the key reasons why the equity market is crashing.

Global sell-off by foreign investors

Foreign Institutional Investors or FIIs can be credited with the responsibility of repeated downfalls in the Indian equity market, as the FIIs are one of the major players in the stock market. According to news reports, FIIs have sold shares worth over $20 billion since April 2021. Relentless selling of shares is putting pressure on the stock market. The FIIs still hold about $620 billion as of March 31, 2022. Stock exchange data revealed that in January the FIIs sold $4.46 billion shares, while in February they sold $4.71 billion, and in March the FIIs sold $5.38 billion. The selling spree is still going on and the holdings of the FIIs in NSE 500 companies fell to a 3-year low in March 2022.

Rate hikes by central banks

The Reserve Bank of India (RBI) on Wednesday raised the key repo rate by 40 basis points (Bps) triggering a 2 per cent decline in the stock markets. Besides, the RBI, the US Federal Reserve also hiked rates by 50 bps, which led to a crash in the global equity markets. The Bank of England, on the lines of the US Fed and the RBI, raised its interest rates to a 13-year high of 1 per cent. Due to rising inflation rates in India and globally, most of the central banks have hiked interest rates in a bid to control the inflation. Apart from rising interest rates, the Bank of England has also warned of looming recession risks due to the ongoing Russia-Ukraine crisis and Covid-induced lockdowns in China.

Geo-political crisis

Markets worldwide are crashing and one main cause behind the fall is geo-political crisis. Stock markets don’t like uncertainty of any form. The war between Russia and Ukraine which broke out almost 2 months ago is still rubbing into the injury. The outcome of the conflict is harsh Western sanctions imposed on Russia that resulted in price rise in commodities, especially in crude oil and metals. The war has disrupted the commodity market. Certain sanctions will have consequences around the world as peaceful resolution seems to be very far-fetched. All these have made the stock market shaky, including India.

High inflation

The high rates of inflation is another key reason for volatility. Rising prices of essential goods are causing problems in every household. This has led to cut back on spending by retail investors and withdrawal of funds. The prospect of ease in inflation is turning bleak and showing no signs of improvement, investors are pulling out their money from the stock market. Most people were under the apprehension of losing money in the stock market when the equities turned volatile. Some analysts have pointed out that when inflation is high no investors want to hold on to stock which is not gaining, hence, the sell-off begins.