Vajram-And-RaviVajram-And-Ravi
hamburger-icon

Indian Stock Market Slide

08-11-2024

09:12 AM

timer
1 min read

Why in News?

The Indian stock market has seen a consistent decline over the past month, with key indices like the Sensex and Nifty falling nearly 1% on October 25, marking the fifth consecutive day of losses.

This drop represents a 7.5% decline for the Sensex in the last month - the largest among global markets during this period.

Introduction to the Indian Stock Market:

  • Understanding shares:
    • Shares represent a unit of ownership in a company, not a physical asset.
    • Companies issue shares to raise funds for various needs.
    • Buying or selling shares requires going through a broker or stock exchange, and share prices fluctuate based on demand and supply dynamics.
  • Types of investments: Investors in the stock market can choose between:
    • Long-term (Equity investments): Designed for extended growth, these are popular for their potential to yield high returns over time.
    • Short-term (Debt investments): Typically, lower-risk, these are intended for quicker returns.
  • How does the share market work in India?
    • The Indian market is divided into two primary stock exchanges:
      • National Stock Exchange (NSE): A leading stock exchange in India.
      • Bombay Stock Exchange (BSE): One of the oldest and most established exchanges in India.
    • The Securities and Exchange Board of India (SEBI) regulates these exchanges to ensure fair practices and investor protection.
    • Here, securities like equities, bonds, ETFs, and derivatives trade at prices driven by demand and supply.
  • Purpose of the stock market:
    • The stock market serves as a regulated, centralised platform where companies and investors meet.
    • Its primary goal is to facilitate business expansion by allowing companies to raise capital through the sale of shares, providing investors opportunities for profit and growth.

Market Overview:

  • Sensex performance: The BSE’s 30-share Sensex dropped by 662.87 points (0.83%) on Friday to close at 79,402.29.
  • Nifty performance: The Nifty 50 declined by 218.6 points (0.9%), ending at 24,180.8.
  • One-month trend: From September 26 to October 25, Sensex fell by 7.5%, while other global indices experienced smaller declines or even gains.

Reasons Behind the Decline:

  • Foreign Portfolio Investors (FPIs) sell-off: FPIs have withdrawn record funds totalling Rs 85,790 crore in October.
  • Geopolitical tensions in West Asia: Uncertainties due to the West Asian conflict have weakened investor sentiment.
  • Corporate Q2 results: Lower-than-expected corporate earnings have impacted confidence. Net profit growth of 502 companies slowed to 4.1% in Q2.
  • Shift to primary markets: Money has flowed from the secondary market to initial public offerings (IPOs), creating a liquidity shortage.

Global Comparison:

  • India has been the hardest hit among major indices, experiencing a 7.5% fall.
  • Meanwhile, other indices like Shanghai (9.99%) and Hang Seng (3.85%) have surged.

Sectoral Impact on Small and Mid-Cap Stocks:

  • High valuations and liquidity shortage: Small- and mid-cap stocks have dropped over 8% due to high valuations and limited liquidity, as retail investors divert funds to IPOs.
  • Individual stock performance: Many small-cap stocks have fallen 20-30%, primarily due to valuation concerns.

Outlook and Future Expectations:

  • Market analysts are cautiously optimistic about a recovery within the next two months.
  • Despite the short-term pressures, the medium to long-term growth prospects of the Indian economy remains strong.
  • Valuations suggest a moderate overvaluation but not at a level that would significantly deter long-term investment.