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Nobody wants the prices of stocks to come down. Investors in shares and bonds want their prices to surge so that they can make good returns. At the same time, the companies in which they invest make all possible attempts to expand their economic activity and deliver better revenues. But what makes the prices of listed shares fall? And what turns this fall into a freefall, literally a nightmare for all stakeholders? These are easy but tricky questions. First things first and it is all about the basic principles of economy. Shares and bonds are shaped by demand and supply forces. When demand is high it drives up the prices, while prices fall when there are more sellers than buyers.
The Indian share market saw one of the worst falls in prices in the month of March 2020. So much so that lakhs of crores of rupees were wiped off and the market value of listed companies took a steep hit. Such was the loss that India’s richest man, Mukesh Ambani of Reliance industries, saw his net worth coming down even as billionaires across the world lost money.
Here, let’s know why the Indian share market bled in the month of March and see if there is hope in the forthcoming days.
1. COVID-19 (n-coronavirus) shock
Why do people buy stock in companies? Because they believe that these companies will do good economic activity, earn profit and pay them dividends. This sentiment took a hit, not only in India but around the globe, when n-coronavirus that began from the Wuhan city of China gripped regions beyond the Chinese borders. You name them- Italy, the US, the UK, Iran, Germany, India or Canada- and they were all battling the crisis. Cities are under lockdowns and factories have been shut. From car manufacturers to raw materials makers for electronics industry, a sizeable chunk has halted their production. And since share prices are directly related to economic activity, they experienced a freefall.
2. Restrictions on travel
The world’s largest economy, the US, has closed its borders for travelers from most countries. In India, no international flights will be allowed to land from March 22 for at least one week. Same is the case with most countries that have shut borders for international visitors. Now that the movement of people has been restricted, business meetings, conferences and trade fairs have either been postponed indefinitely or cancelled. This will directly impact economic output of companies and investors thought it best to sell shares of companies and rather have their money in traditional saving options such as bank FDs, PPF and of course, gold.
2. Foreign institutional investors’ selling spree
Another reason that brought the market down at historic levels was the negative sentiment of foreign investors in Indian shares. National Stock Exchange data reveals a shocking picture. FIIs have remained a new seller every trading day since February 24, 2020. FIIs had been investing heavily in Indian market ever since PM Modi assumed office in 2014. However, the uncertainty over economic activity in the times of COVID-19 has compelled them to sell their investments in India. Experts say that since investors have been converting their equity-traded funds into hard cash, money managers are left with no option than to sell off their holdings.
4. The YES Bank spillover
Once the hot favourite for retail as well as institutional investors, YES Bank shares have been under pressure since the revelation about NPAs and unlawful diversion of funds. When RBI announced a moratorium and those holding accounts in the bank were restricted from withdrawing more than 50,000 from their accounts until the moratorium is lifted, it worked as a shock for investors who were already reeling under the crisis that started with PNB-Nirav Modi fraud case and then IF&FS and DHFL. And when RBI proposed that holders of YES Bank’s AT1 bonds may see their investment written down, it triggered panic in the bond market.
5. Not India alone, its a global selloff
From Japan’s Nikkei to MSCI’s index of Asia-Pacific shares, literally every share market is down. Dow Jones Industrial Average fell more than 5 percent in overnight trade and S&P and Nasdaq also saw unprecedented sell-offs. The Euro Stoxx 50 futures have also lost their value. What was expected in such a scenario from the Indian stock market? Indeed, Indian companies are constituents in the global supply chain and the sell-off across all markets made investors in Indian companies worried, and hence the plunge that we experienced in recent days.
That n-coronavirus is the key reason that has led to the sharp fall in Indian share market is a sure thing. At this time, many cities in India and across the globe are still under lockdown and since no one can predict with certainty what future holds, the share market and stock prices are set to remain volatile. This may be the most apt time to buy shares; however the risk that accompanies shall not be overlooked.
Also read: Starting A Business Is Set to Become Easier
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