A Historical Overview of India's Stock Market: Past Crashes and Future Predictions
Introduction
Hello Traders/Investors. The Indian stock market, which rallied to a record high this week, is expected to continue its upward trend by the end of 2023, according to market experts. Despite widespread expectations of a gradual slowdown in the economy, the forecast remains optimistic. However, it is crucial to look back at the history of the Indian stock market to understand the potential risks and learnings from past crashes.
Early Beginnings: 1865
India's stock market has a rich history that dates back to 1865, long before the establishment of the Bombay Stock Exchange. The market's origins can be traced back to traders gathering at the corner of Meadows Street and Rampart Row, where they would mutually trade stocks of Indian companies. The American Civil War, which began in 1861, significantly increased the demand for cotton, a major export commodity. This led to a sharp increase in cotton prices, boosting the stocks of companies involved in its production and export, and attracting investments from traders.
However, the end of the Civil War in April 1865 resulted in a decline in cotton prices and demand. This sudden shift caused a significant crash in the stock market. This early instance demonstrates the vulnerability of stock markets to external economic factors and the importance of diversification.
The Birth of the Bombay Stock Exchange: 1875
The Bombay Stock Exchange, formed in 1875, became the first established stock exchange in Asia. The early 1870s saw the relocation of many stockbrokers to Dalal Street, laying the foundation for what would become one of the most significant stock markets in the region.
The Dhirubhai Ambani Story: 1982
The story of Dhirubhai Ambani in 1982 highlights the role of individual intervention in preventing market crashes and maintaining public confidence. In 1982, the share price of Reliance Industries dropped sharply, from Rs.131 to Rs.121. This was a period when stock markets had a 14-day settlement period, similar to intraday trades today. Ambani, recognizing the potential for a bear cartel to exploit the market, organized a group of brokers to buy Reliance shares to counteract the short-selling activities. This collective action ensured a fair market and prevented the exchange from closing indefinitely, thus maintaining market stability.
The Harshad Mehta Scam: 1992
The Harshad Mehta scam in 1992, often referred to as the Big Bull of the Indian stock markets, marked a significant downturn. Mehta manipulated share prices by inflating demand and then selling at inflated prices. For example, he bought shares of ACC Limited, raising their price from Rs.200 to Rs.9000 in 2-3 months. When the scam was exposed, the Sensex plummeted by over 50% in a year, a period marked by economic uncertainty and a bear market lasting over two years. This incident underscores the importance of regulatory measures and ethical practices in preventing such manipulations.
The Financial Crisis of 2008
The global financial crisis of 2008 had a profound impact on the Indian stock market. On January 21, 2008, Black Monday, the Sensex fell by 1408 points, marking a significant loss of investor wealth. Key factors contributing to this fall included a change in global investor confidence, widespread fears of a U.S. recession, a drop in U.S. interest rates, volatility in commodity markets, FII and hedge fund selling of emerging market stocks, and margin calls on derivative positions. By the end of 2008, the Sensex had dropped from around 20465 points to 9716 points before recovering to cross the 20000 mark in September 2010. This event highlighted the interconnectedness of global markets and the impact of macroeconomic events on local markets.
2015 Flash Crash
In 2015, the Sensex fell sharply by 1624 points on August 24, marking a significant drop in market performance. This incident, while significant, did not reach the magnitude of the 2008 financial crisis. It was attributed to the unexpected political developments, particularly the unexpected defeat of the National Democratic Alliance (NDA) government, and concerns about the continuation of economic reforms.
Conclusion
While the Indian stock market shows strong potential for growth in the future, understanding its past is crucial. Historical crashes provide valuable lessons on market volatility, regulatory oversight, and the importance of ethical business practices. As the market continues its upward trend, it is essential to remain vigilant and adapt to changing economic conditions to navigate the future effectively.