Stock Market Crash: Why Sensex Tanked 900 Points, Nifty Hit 4-Month Low

Indian stock market continued to decline for the sixth consecutive session on Thursday. The benchmark BSE Sensex opened at 63,774.16 and touched an intraday low of 63,119.21 within the first few minutes of the session.

The market capitalization of all listed companies on the BSE (Bombay Stock Exchange) slipped by 5.78 lakh crore to Rs 303.44 lakh crore.

The Nifty opened in red at 19,027.25 and breached the 18,900 level to touch an intra-day low of 18,943.30.

The Sensex plunged 900 points or 1.71 per cent to settle at 63,148.15. The NSE Nifty settled 267 points or 1.39 per cent to settle at a 4-month low of 18,857.25. All the sectors settled 1-2 per cent down.

Why the stock market is falling?

Geopolitical tensions, along with sticky US Treasury yields at around 5 per cent, triggered risk-off sentiment. Additionally, mixed Q2 results, persistent FIIs selling, rising crude oil prices, and near record high USDINR to above 83, have also dented investor sentiments.

Mukesh Kochar, National Head of Wealth at AUM Capital, said the market was looking for some reason to correct as the valuation was not comfortable. The main reason for correction can be attributed to the worsening of geo-political tension, rising US yield, and profit booking before the upcoming election.

Israel-Hamas conflict

"There is risk-off in global equity markets triggered by a combination of economics and geopolitics. The Israel-Hamas conflict continues to be a major headwind for markets. If the conflict lingers for long it has the potential to impact global growth, too, when the global economy is already amid a slowdown," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Israel on Thursday said that a group of tanks and infantry conducted a night-time incursion into Gaza, targeting several locations under Hamas control before coming back to Israeli territory.

According to a Reuters report, the Israeli military said that the number of people confirmed held hostage in the Gaza strip since October 7 cross-border raids by Hamas had reached 224 and could increase further.

Rising US Yields

“The recent fall in the markets was primarily due to global concerns around geopolitical risks as well as weak risk appetite in developed markets due to higher US treasury rates,” said Narendra Solanki, Head Fundamental Research - Investment Services, Anand Rathi Shares and Stock Brokers.

US bond yields have reached the highest level since 2007. The US benchmark 10-year bond yields have increased over the past week to cross the 5 per cent mark. The rising US bond yields are a negative sign for equities and emerging markets like India as it takes away the incentive to invest in these markets after adjustments due to currency fluctuations.

Elevated interest rates have rendered debt investments increasingly attractive, leading to a subtle migration of capital from equities to debt, according to Anita Gandhi, Director, Arihant Capital Markets Ltd.

FII Outflows

FII has also increased their pace of selling and that might continue in the short term until rates pick out in the United States, said Kochar.

Amid global uncertainties, investors might be moving away from emerging markets to safer havens like gold, bonds, currency, etc. In October 2023, FIIs have offloaded stocks worth Rs 17,396 crore till October 25, 2023. In the past two months, FIIs remained net sellers dumping local equities worth Rs 47,313 crore.

“However, the market landscape underwent a significant shift with the introduction of regulatory guidelines by the Securities and Exchange Board of India (SEBI). Effective November 1st, Foreign Portfolio Investors (FPIs) with equity exposures exceeding ₹25,000 crore must disclose investor names for companies with over 50% FPI holdings,” said Gandhi

“This regulatory change triggered substantial selling in small and mid-cap stocks on October 23rd, with market closures on the 24th. FPI selling continued in the cash segment on October 25, further influencing market sentiment,” she added.

Mixed Corporate Earnings

India's ongoing corporate earnings season shows a mixed picture. The IT sector, particularly among large-cap firms, has grappled with mounting pressures. While the banking sector has mainly posted favorable results, concerns loom regarding the potential plateauing of Net Interest Margins (NIMs).

Vinod Nair, Head of Research at Geojit Financial Services said that to date, the actual domestic Q2 results are below par in comparison to the excited earnings forecasted. Similar disappointments are visible in developed economies. The downgrade is earnings and valuation is arising due to the risk of further slowdown of the economy due to geopolitical and elevated interest rates.

Pre-election Swings

Santosh Meena, Head of Research, at Swastika Investmart Ltd said the market appears to be entering a phase of consolidation in preparation for the pre-election rally. Historically, Indian markets tend to initiate their pre-election upswings approximately six months before the election outcome. Accordingly, it is reasonable to anticipate the beginning of a pre-election rally around the time of Diwali.

“From a domestic perspective, it is a good opportunity for long-term investors to deploy fresh funds in good growth stocks. We do not see any long-term impact on the Indian economy,” said Solanki.

According to Kochar, this correction is considered a routine occurrence within the framework of a structural bull market, characterized by a significant retreat following a period of exuberance in midcap, smallcap, and SME sectors.  In terms of market behavior, further correction could be expected, with the Nifty potentially testing its 200-day moving average (DMA) at around 18,700.

Analysts said this could present an attractive buying opportunity for investors looking to participate in the anticipated pre-election rally. Investors should remain composed and avoid panicking during these market fluctuations. Instead, they should be prepared with a list of high-quality stocks to capitalize on this dip.

“Our near-term advice to investors is not to panic in this market. Stocks that are overvalued and lack quality should be sold, while quality businesses can be accumulated at these levels. Focus on large caps and quality to navigate the current volatility in the equity markets,” said Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS.