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We have all read the latest news about the Indian economy and the stock market crash. 150-year-old investment banking institutions went bankrupt, people eating bats to curb hunger, and even a person riding a horse to work due to the rise in oil prices. 

But most market crashes are caused due to multiple reasons and catalysts that spark a change in the economy. 

So, let's take a look at the stock market crash in India, why it happened, and some possible reasons that caused the Indian stock market crash.

What is the Stock Market Crash?

A stock market crash is an unprecedented drop in stock prices in the market. In certain cases, a stock market crash can be the side effect of some major catastrophic events or the collapse of long-term speculative bubbles. One of the major contributors to a stock market crash is public panic. When stock prices start falling, it induces panic selling in public, which further depresses prices.

Some of the infamous stock market crashes to remember are: 

  • The 1929 Great Depression
  • The 1987 Black Monday
  • The 2001 dot-com bubble burst
  • The 2008 Financial crisis
  • The 2020 COVID-19 pandemic.

NIFTY50 at an All-Time High

During the last year, the 50-stock index NIFTY50 hit almost 18,600 points in October. That was over a 125% gain over 19 months post the Covid-pandemic crash in 2020. But, post the jump, what Indian and foreign investors did in India surprised everyone. 

What Happened in October 2021?

October 2021 saw a decline in the market by 18% with 15,183 points. But, the market has undone some damage and has increased to 16,340 points. Still, considering the high of 18,600 points, it was down by 12%. 

Why Did the Stock Market Crash?

Globally the market has been in the red for this present year. This resulted in billions of dollars in the stock market. With the market going into recession, stock market pandits are gearing up for macroeconomic disasters, and India is not an exception. 

So, let's take a look at why the latest stock market news and why crashed.

Reasons for the Stock Market Crash This Year

1. Variants of Covid-19

With the latest Omicron variant discovered in November, its quick spreading concerned health authorities across the world. Similarly, investors also got scared. As a consequence, the market suffered a minor blow as some states in India announced lockdowns to curb the spread. This posed a major threat, especially in the hospitality, entertainment, and tourism industries. But, with the strain being declared endemic, the market rebounded quicker than the 2020 crash. 

2. Cracks in the Supply Chain

The two major Covid waves unearthed the stress faults in the global supply chain and logistics. China has always been considered to be the world's largest production house and supplier for multiple industries. But, when COVID-19 hit, the Chinese government announced lockdowns across the nation to prevent the spread. This led to a break in the supply chain and led to an increase in the price of raw materials and capital goods. 

This led to a rippling effect that spread to the world. The supply of hundreds of commodities stopped or slowed down. People started getting nervous and hoarding products, which in turn led to shortages in the market. When investors saw these changes, they grew nervous and started pulling out of the stock market. Now, even though the market is slowly bouncing back, the cracks in the supply chain are still roaringly apparent. 

3. Ukraine- Russia War

When Russia invaded Ukraine in February, it threw the entire global economy into a crisis. Crude oil prices skyrocketed from $90 a barrel to $139 a barrel. But before the invasion, with the tension building, prices were already showing an upward trend. Due to this price increase, the prices of energy, oil, and commodities rose. This, in turn, led to inflation which consequently ate into the company's profit margins. Because of the rise in prices, the purchasing power of customers decreased. 

4. A Raging Inflation

Due to Covid-19, lockdowns were posed across all the countries across the globe. This, in turn, led to a fall in demand for products. To prevent a recession from happening, central banks slashed their interest rates. Even though this helped the country move away from recession, it led to a surplus supply of money and excessive borrowing. Consequently, this led to an increase in the demand for goods and services, which led to an inflationary market. Also, considering the cracks in the supply chain, even with the soaring prices, inflation rates reached unreachable highs. 

5. Hike in Interest Rates

As a consequence of the inflation, and an increase in demand for products, banks of developing countries like India increased their rate of interest. Because of this, investors started taking out money from the stock market and putting them into debt instruments. Because of this, the stock market news saw a decline in funds. 

6. Foreign Portfolio Investors Selling off Indian Stock

Because of all the above-mentioned reasons and changes in interest rates by central banks, Foreign Portfolio Investors FPIs sold shares worth Rs. 2.56 lakh crores in the Indian stock market. FPIs are investors from foreign countries who invest in India. Some experts speculated that FPIs were looking at profits across all emerging markets touching all-time highs and were more interested in investing there than in the Indian share market. Other experts speculate that FPIs are growing more cautious as the chances of the US market going into recession are increasing. 

7. Higher Valuations

Another major reason that led to the market crash was high valuations. Post the COVID-19-led stock market crash, the market slowly rebounded, which led to valuations reaching an all-time high. 

There was a significant rise in stock prices during this period. But, the earnings of multiple companies did not improve following the rise in prices. Some experts predicted that this disconnect in price value led to the stock market crash.

Stock Market Crash Results

With the Indian stock market now trying to overcome the crash, there are some green lights that investors are looking forward to. Gradually the prices have been moving towards the higher side from the 52-week low. But there are still multiple concerns. 

Still, now is a good time to look at stable companies that have strong fundamentals in place. Most companies are trading at their lowest price-to-earnings and price-to-book ratios. 

Also, the rupee-cost averaging is a great way to ride the bear market tide. Rupee-cost averaging means the process by which investors set aside an amount every month and only invests that amount. So, as the prices keep rising, investors get fewer stocks. But, if the price decreases, they can buy more. One key benefit is to help control investor sentiments. So, what are you planning on doing? Saving, buying, or investing?     

About Author

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Founder & Managing Director of Investor Diary

I, Vishnu Deekonda, am dedicated to providing the proper financial education to every individual interested in becoming financially independent through intelligent investments.

I have trained people to build financial independence and observed people had got many myths about investing for beginners. I want to prove to such individuals that these myths are the bottlenecks to a successful trading portfolio. I wanted to share the knowledge I have gained through a decade of experience with the people willing to build a healthy stock return with less or no risk.

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