4 Reasons Why the Indian Stock Market is Falling

The bears returned to Dalal Street last week.

Investors and traders who thought the bull market had restarted, after the Indian stock market scaled a new all-time high, received a rude shock.

As per a report in the Mint, about Rs 8 trillion (tn) in wealth was wiped out on Friday as the indices plunged.

The fall was so staggering, that all thoughts of new highs disappeared along with the positive sentiment that was prevalent on the street.

So what cased the sharp decline in the markets?

In the article, we will examine why the Indian stock market is falling.

Why Indian share market is falling

#1 Rising Covid Cases in China

China has seen a massive outbreak of coronavirus infections. With millions of cases being reported daily, it's the world's largest outbreak.

This has come at a time when the world was ready to put covid behind it. But the new, devastating outbreak in China, has raised serious concerns around the world.

At this point, no can estimate how long this surge in Chinese covid cases will last, how many will be infected, how many will lose their lives, and as far as financial markets are concerned, if it will spread around the world.

On that last point, the experts seem to agree that the new covid variant causing chaos in China will, most likely, not be as dangerous in other countries due to high levels of immunity and high vaccination coverage.

Even if this new variant were to spread around the world, we're unlikely to see a wave as deadly as the previous ones.

But as far as financial markets are concerned, there will be disruptions caused by this covid wave in China. It is the second biggest economy in the world. So many companies, including the biggest ones, will be impacted one way or another.

There may even be lockdowns in some parts of the world if the situation turns out to be more dangerous than anticipated.

The good news is that governments around the world are preparing for the worst, and we could see a better response to a spread out of China than we saw in 2020.

Investors too are tracking the Covid 2023 developments closely and looking for the new winners and losers.

Thus a repeat of the 2020 crash looks unlikely unless the situation goes out hand.

#2 Rising Interest Rates

Interest rates around the world were drastically cut at the time of the first covid wave back in 2020. They were still low as of late 2021. Central banks around the world had not begun to raise interest rates.

That changed with the US Fed's first rate hike last year. The US Fed is, in a way, the world's central bank. If the Fed raises rates, all other nations will follow. And that is exactly what has happened over the course of 2022.

In India, the RBI first hiked the repo rate as well as the CRR. Then it followed it up with more rate hikes. The market expects a few more rate hikes by the RBI in 2023.

The era of easy money has come to an end. The focus of central banks now is to fight inflation. The impact of rate hikes has already been felt across asset classes. A good example is the crypto crash and the crude oil crash.

The market knows that to fight inflation effectively, rate hikes are being front loaded i.e. big hikes are being taken first and smaller hikes will follow.

Thus interest rates have gone up across the board from bank FDs to government bonds. As rates go higher, investors move their money out of risky assets like equities and into safer fixed income assets as well as cash and money market accounts.

This process is well and truly underway in financial markets all over the world. There are many high net-worth individuals who are just sitting on cash and some safe liquid assets right now. They are in no hurry to invest in stocks.

#3 Profit Booking

Sometimes, the correct answer is also the easiest.

Most Indian investors, who jumped into the market after the covid crash of March 2020, are sitting on a good amount of profit.

Sure, they may have suffered losses in the first half of 2022, but otherwise their trading accounts are in the green. And a significant amount of these gains have come recently, since July or even as recently as October.

So it's not surprising that they are selling now. They don't want to lose their recent gains in the same way they last them in earlier this year.

Also, many investors who remained invested throughout the crash in early 2022, due to the Russia-Ukraine War, had broken even and were back in the green in their portfolios.

These investors would be extremely fearful of a repeat crash. It's highly likely that many of these patient investors sold recently.

#4 Fears of a Global Recession in 2023

It's safe to say this is the most talked about topic in the financial world. There is a legitimate fear of a global recession in financial markets.

Many economists too are of the opinion that a recession could occur in 2023. This is more likely if the US Fed's interest rate hikes stifle demand too much from individuals and businesses.

In fact, some market gurus believe the US and Europe are already in a recession...and the rest of the world will soon follow.

This is very bearish news for the stock market and risky assets in general. For example tech stocks have already fallen into a deep bear market. It's no wonder investors are wary.

Now it's unlikely that the Indian economy will face a recession. India is growing fast and long-term investing is likely to produce excellent results.

However, investors are well aware that India won't be immune to a global recession. And that concern has tempered the bullish sentiment to an extent in the market.

However, all this does not mean you should abandon the stock market entirely. Even in the biggest crashes, there are always stocks that do well.

There will be top performing stocks in 2023 as well. It's just a question of finding them.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...