Manic Monday on D-Street: 10 reasons why Sensex and Nifty witnessed worst fall ever

SUMMARY

By CNBC-TV18Mar 9, 2020 4:35:02 PM IST (Updated)

Coronavirus-led disruption | The Coronavirus outbreak has disrupted supply chains of industries globally, which is impacting economic activity. Authorities have not been able to get a handle on the situation yet, with fresh cases surfacing every day. This is hurting global economic growth, and many big companies have begun issuing profit warnings.

Global markets sell-off | Equity markets across the globe have taken a beating over the last few weeks, as investors grapple with the uncertainty caused by the coronavirus epidemic. India too is feeling the heat of the meltdown in global markets.

Massive FII selling | Foreign institutional investors have net sold close to Rs 9,000 crore worth of Indian shares so far in March. The one-way slide in the Sensex and Nifty indicates that there is not enough of domestic liquidity to absorb the heavy selling from foreign funds.

Weak rupee | Besides global factors, the weakness in the rupee is one of the reasons for foreign funds selling Indian shares. A falling rupee reduces value of the foreign fund's portfolio in dollar terms. While foreign funds do factor in some amount of currency depreciation when investing in emerging markets like India, they may think it prudent to exit temporarily when there is too much uncertainty.

The Yes Bank fall-out | The bail out of Yes Bank by the government and RBI through State Bank of India (SBI) has stoked concerns about the health of the financial sector in general, and mid-sized private banks in particular. There are fears that credit flow in the system could get choked, making matters worse for NBFCs and small and medium enterprises. This in turn could aggravate the slowdown in the economy.

Steep fall in index heavyweight stocks | The rally in the Sensex and Nifty to record highs in January this year was driven by a handful of stocks with high weightage in the indices. With the mood now being one of panic, many investors are pulling out of profitable positions to make up for losses in other stocks. This has caused index heavyweight stocks to fall sharply.

Steep fall in crude prices | While global crude prices may not have a direct bearing on Indian shares, mayhem in the crude market is hurting sentiment globally, fueling the sell-off across asset classes. That is because a steep fall in crude oil prices is seen as an indicator of weakness in the global economy.

Short selling | Whenever stock prices are in a free fall, many traders short sell stocks and indices through the futures market, in the hope of prices falling further. While short selling is a common and accepted practice in stock market, it does amplify the slide in prices during a panic. That is because short selling often ends up triggering a vicious cycle of falling prices, wherein lower prices prompt more sellers to join in.

Temporary liquidity squeeze | Many institutional investors and high net worth individuals who have subscribed to the SBI Card IPO are yet to be refunded their application money for unalloted shares. That works out to around Rs 1.7 lakh crore, a sizeable portion of which is borrowed funds.

Algo trading | With algorithm-driven trading gaining popularity, declines tend to get amplified. That is because a trading software can promptly and unemotionally dump shares and futures if they are programmed to do so at certain price points. And when multiple softwares do that all at once, prices nosedive.