What Caused the Drop in Indian Stock Markets in March 2021 and Beyond
On March 18, 2021, the Indian stock markets experienced a significant drop, or as it is often referred to in the financial world, a gap down. This was not a sudden crash, but rather a reflection of a larger trend in the world market. The Indian stock market saw a substantial correction, a natural event that was to be expected given the surges we have seen this year.
Understanding Supply and Demand in the Stock Market
One of the key factors leading to this market drop is the balance of supply and demand in the market. Essentially, when there are more individuals who want to sell a particular stock than those who wish to buy it, it leads to an oversupply in the market. This imbalance directly affects the price of stocks, causing them to fall. As an investor or trader, understanding supply and demand is crucial. The relationship between these two forces is straightforward: when supply exceeds demand, prices fall, and vice versa.
Impact of US Inflation and Employment Data
The recent drop in the Indian stock market also had ties to the US market. The revelation of US inflation data disappointed many analysts, as it was not as low as anticipated. Coupled with strong employment data, these factors led to expectations that the Federal Reserve might hike interest rates again. Such a move would result in capital flowing from the stock market into the bond market, further exacerbating the drop in stock prices. This inter-market relationship underscores the importance of keeping a watchful eye on global economic indicators.
The Ukraine Conflict and Its Effect on the Indian Stock Market
On February 24, 2022, another significant event occurred that influenced the Indian stock market. Russian President Vladimir Putin announced military operations in Eastern Ukraine. This announcement, coupled with Russia’s recognition of the independence of two separatist regions, triggered a chain reaction that led to a massive decline in the Nifty 50 and the BSE-Sensex.
At 9:30 am on February 24, 2022, the Nifty 50 index had fallen by 2.4 percent or 414.5 points, closing at 16651. The BSE-Sensex had fallen by 1726 points or 2.6 percent, closing at 55867 points. This decline marked the second time since the March 2020 crash that the domestic benchmark equity indices entered a correction territory.
Long-term investors in India are advised to remain extremely cautious and to closely monitor the international scenario for at least the next 30 days. These events, combined with the pressures from the US market, highlight the importance of global economic stability on the Indian stock market.
[Update at the end of trading hour: The Nifty 50 fell 4.78, and the Sensex fell 4.72.]
The ongoing conflict in Ukraine and its impact on global markets serve as a stark reminder of how interconnected the world economy has become. While the Indian stock market may be affected by these external factors, it is important for investors to remain informed and adaptive to shifting economic conditions.