Why the Indian Stock Market is Falling

Editor's note: Investors are worried about the decline in the stock market. Over the last two weeks, the market sentiment has changed from bullish to bearish. The Nifty is back down to 17,000 levels.

What's behind all the negativities driving the market lower? In this editorial, we attempt to provide the answers.

The Indian stock market peaked in October 2021.

The Nifty was trading just above 18,500 at that time. There was a sense of euphoria in the air.

Investors were ready to believe forecasts of Nifty 20,000. In fact, at that time, it seemed like a self-fulfilling prophecy.

But that didn't happen.

Instead the stock market has been hit by a series of events that could send it into a full-fledged bear market. Investors are wondering how to invest in the market today.

What are the reasons for the market crash? Why is the stock market falling?

Let's list them one at a time...

Geopolitics

The first problem was the likely rise in geopolitical tensions following the US withdrawal from Afghanistan. But the markets dismissed this concern and moved on.

If investors had paid more attention to geopolitics, they would have seen Russia's war on Ukraine a long time before it happened.

Supply Chain Issues

Then came the realisation that supply chain issues, especially food, oil, and semiconductors, were going to last for a while, perhaps a few years.

But the market was willing to give this a pass as the belief was the problems would sort themselves over time as global supply chains recovered slowly.

This was a big miscalculation. The problems have only gotten worse.

Omicron

Then came Omicron.

The latest variant of the coronavirus threatened to cause disruptions around the world. The market waited and watched the spread of this variant as we moved into 2022.

It didn't take long for the market to realise that Omicron wave wouldn't be as dangerous as the previous waves. Thus, this concern too was ignored.

At this time, the start of 2022, the markets were still in a bullish phase. The US market was on a roll and the Indian market was slowly getting close to its all-time high.

But then everything changed.

Russia-Ukraine War

When the Russia-Ukraine war began commodity prices went through the roof. This time it wasn't just oil. Prices of food, fertiliser, natural gas, and various metals hit new records. Inflation, which was already high, received another big boost.

This severely hurt household budgets. People began cutting back of consumption.

As the markets fell, more and more retail investors began pulling their money out. One reason was to shore up their household finances. The other reason was the lack of quick profit making opportunities.

Then came the straw that broke the camel's back.

Rising Interest Rates

Interest rates were still low at the start of the Russia-Ukraine war. Central banks around the world had not begun to aggressively raise interest rates.

That changed with the US Fed's rate hike. It's said the US Fed is the world's central bank. If they raise rates, other nations will soon follow. And that is exactly what has happened over the last few months.

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 another rate hike by the RBI in a few days.

With this, we can say the era of easy money has come to an end. The focus of central banks now will be 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 has realised that to fight inflation effectively, rate hikes will likely be front loaded i.e. big hikes will be taken first and smaller hikes will come later.

This has led to interest rates going up across the board from bank FDs to government bonds. As rates go higher, investors will move funds out of equity and into fixed income assets.

This process has already begun and is likely to accelerate going forward.

FII Selling

Another reason for the fall in the market has been the relentless selling by FIIs.

Since October 2021, they have sold more than Rs 3.5 lakh crore. So it's safe to say that FII selling has been the biggest reason for the market failing the reach a new high.

In fact the only reason why the Indian indices haven't collapsed yet, is the dutiful buying by Indian retail investors. Without their support, the Indian stock market would have crashed a long time ago.

US Recession

Recession in the US is the talk of the town.

The first two quarters of GDP growth in the US was negative. This tells us that the US is already in a recession. They say if the US sneezes the world catches a cold. The market thinks if the US is in a recession, there could be a global recession. This fear has been driving markets lower.

Fear, Uncertainty and Dread (FUD)

Uncertainty is a dirty word in the market. Investors like to pretend they know what is going to happen.

That's why they create narratives to explain what's going on. All kinds of narratives were invented to justify the continuation of the bull market since the March 2020 low.

But now the market has run out of rosy narratives. In fact, all the narratives are negative now. Fear is the dominant emotion.

Even worse, there is uncertainty about when the situation will improve. If there was at least some clarity on this front, the market would have had an excuse to rally. But that is not the case.

So investors don't know if they should cut losses or dig in. Fear, uncertainty, and dread, now rule investor sentiment.

Stocks Went Up Too Much Too Soon

This should be obvious to everyone. If we had a slow and steady bull market over the last two years, it's unlikely the market would be facing such a dire situation.

Instead we had a sharp V-shaped recovery from the Covid crash. Stocks went up too much too soon. They kept rising even after prices far exceeded fundamentals. It was inevitable these so-called 'hot stocks' would come back to reality.

It's for all these reasons the stock market is on a downward slide. The fear of a global recession is the biggest reason at the moment. And the markets seem justified to worry about that.

However, falling stock prices will create excellent buying long-term opportunities in fundamentally strong stocks. And investors should not miss out.

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...