Sensex in India have been at free fall from Last 10 months, when the Bharatiya Janata Party won a majority in the general elections, the stock market surged. The Nifty rose to 7275 as the election results came through. The optimism continued until March 2015, when the index hit an all-time high of 9119. The Nifty is now backing to 7300-7400 levels again. Recently Sensex crashed 905 points in a single day, tracking a sharp selloff across global markets. The Sensex ended 855 points lower at 26,987, its biggest one-day point fall since July 6, 2009 .The fall in stock market is more surprising as India's GDP is growing at 7.3%,which is one of the Fastest In the world.
Reasons Behind the Fall?
• Global slowdown is one of the most important reasons behind the fall in the stock market, since it has made investors risk averse about investment.
• US Federal Reserve has finally ended Quantative Easing programme under which the interest rates were kept quite low in order to revive investment and growth in the economy, Due to lower interest years many investors shifted to emerging economies where interest rates were very high in comparison to US, However since interest rates have been increased by the US fed reserve, it has made US market attractive for investor since it is stable.
• Slowdown in growth in emerging economies like Russia, Brazil and South Africa has made investors apprehensive about prospects in emerging economies, this has resulted in capital outflow from all of these countries to safe markets like US and thus the fall in Indian stock market is in line with what is happening in other emerging economies.
• Slump in crude oil prices has adversely affected the economy of oil exporting countries specially the rich Arab countries, RUSSIA etc.. Generally investors from these countries had surplus capital which they used to invest in emerging economies to earn higher returns, but these investors are taking their money away from emerging economies and also new FII is not flowing from these countries into emerging countries including India. This has also resulted in stock market fall.
• Rupee has fallen to 2 year low, it has fallen to 68 for 1 $.This heavy depreciation of Rupee in Last few months has made FII investment in India Prone to foreign exchange risk. Which had led to FII investors pulling out money from India? Since economist believes that Rupee can touch 70 marks in few months which would decrease the real rate of returns for FII INVESTORS IN India.
• The slow economic recovery, poor show reported by Corporate India quarter-after-quarter, fresh concerns over rising NPA of public sector banks and Number of important reforms like GST and Labour reforms being stuck in Parliament Logjam has dwindled the investors "animal spirit" and also its optimism to invest.
• Slowdown in the Chinese economy and devaluation of Yuan.
Would this fall Persist in Long Run?
• While, the stock market is not necessarily a great barometer of economic health. But every industry-specific market index has lost ground in the past year. No industry has delivered a standout performance in terms of better profits or higher revenues. The breadth of the downturn suggests that the stock market is indeed indicating serious problems within the Indian economy.
• However, This fall may not persist in long run, since the Fundamentals of Indian economy are strong .We are the fastest growing economy in the world, Twin deficits i.e. Fiscal and current Account deficit both are under control.
• The country's demographic profile makes sustaining high growth rate easily possible. India is one of the few countries in the world with the inherent ability to bring interest rates down. That our inflation is down is not merely a consequence of falling global commodity prices but also due to disinflationary trends in domestic economy clearly evident from the CPI.
• If commodity prices remain subdued then it would continue to help an importing nation like India. And when the corporate earnings recovery does eventually gather momentum, it would witness a curb of 20%+ for 3-4 years easily. GST, of course, would be an added boost to the market. Thus it is unlikely that the fall in stock market would persist in Long run.