Stock Market Crash: 5 Reasons Why Sensex and Nifty Plunged Amid Volatility

In a highly volatile session on Friday, October 4, domestic equity benchmarks Sensex and Nifty 50 extended their losses for the fifth consecutive day. The market downturn, which has resulted in the steepest weekly fall in over two years, has left investors reeling as geopolitical tensions and foreign outflows continue to weigh heavily on market sentiment.

Both Sensex and Nifty 50 tumbled by around 4.5 percent this week, marking their worst performance since June 2022. The benchmarks have shed over five percent since hitting record highs on September 27. The volatility in the market, fueled by a series of adverse factors, has wiped out nearly ₹13 lakh crore in investor wealth in just five trading sessions.

Here are five key reasons behind the steep decline in the Indian stock markets:

1. Israel-Iran War and Geopolitical Tensions in the Middle East

The ongoing geopolitical conflict between Israel and Iran has significantly contributed to global market instability. Tensions escalated after Israel's killing of Hezbollah leader Sayyed Hassan Nasrallah in Beirut, triggering retaliatory threats from Hezbollah in Lebanon and the Houthi militia in Yemen.

With crude oil prices surging by over five percent in the past two days, concerns are rising that the conflict could disrupt global oil supplies. Given that a fifth of the world’s crude passes through the Strait of Hormuz, any potential retaliation targeting Iran's oil fields would likely exacerbate the situation, pushing oil prices even higher. The uncertainty surrounding oil supply has led to heightened market volatility, particularly affecting net importers like India.

2. Rise in Global Crude Oil Prices

The escalation in the Middle East has driven crude oil prices to a significant high, with Brent crude futures posting a 10 percent gain for the week. This rise in oil prices is a direct consequence of supply concerns, as the Middle East accounts for about one-third of the world’s crude oil production.

Though OPEC+ has announced plans to boost supply in December, the market remains jittery over potential supply disruptions. Rising crude prices are detrimental to the Indian economy, as India is a major oil importer. This has dented market sentiment, leading to a broad-based selloff, particularly in sectors sensitive to input costs like realty, auto, and FMCG.

3. FII Outflows

Foreign Institutional Investors (FIIs) have been aggressively selling Indian equities, adding to the market’s woes. On Thursday alone, FIIs offloaded stocks worth ₹15,243 crore—a record daily outflow over the past four years. Over the last three sessions, total foreign outflows have crossed ₹30,600 crore.

Much of this selling is attributed to a shift in investor focus towards Chinese markets, where recent fiscal stimulus measures by Beijing have revived investor confidence. With cheaper valuations and hopes of an economic recovery in China, FIIs have been pulling out of Indian equities and redirecting funds to China, exacerbating the downward pressure on Indian stock markets.

4. SEBI’s New F&O Trading Norms

The Securities and Exchange Board of India (SEBI) recently implemented a set of new regulations aimed at cooling down exuberance in the booming Indian derivatives market. These measures, which include reducing weekly expiries to one per exchange and increasing lot sizes, have made F&O trading less accessible to smaller retail traders.

These regulatory changes are expected to have a significant impact on trading volumes, particularly among discount brokers who cater to retail investors. As market participants adjust to these new norms, the stock market has experienced additional volatility, contributing to the recent correction.

5. China's Fiscal Stimulus Attracts Foreign Investors

China’s recent fiscal stimulus, aimed at reviving its struggling economy, has been a key factor in driving foreign investors away from Indian markets. The Chinese government has announced a series of measures, including cutting reserve requirement ratios (RRR) for banks and reducing key interest rates, to stimulate economic activity and improve corporate earnings.

As a result, foreign portfolio investors (FPIs) have shifted capital to China, lured by cheaper valuations and expectations of a market rally. The outperformance of Chinese stocks, particularly the 18 percent surge in the Hang Seng index in September, has further fueled this trend, leaving Indian markets exposed to foreign outflows.

Conclusion

The Indian stock market's sharp decline this week can be attributed to a combination of geopolitical risks, rising crude oil prices, foreign investor outflows, regulatory changes, and the allure of China’s economic recovery. While the market correction may seem concerning in the short term, some experts believe it could present an opportunity for investors to accumulate quality stocks at lower prices. However, with ongoing volatility, traders and investors are advised to remain cautious and adopt a hedged approach until market conditions stabilize.

Reference From: www.livemint.com​