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The Indian stock market experienced a significant downturn on October 3, with the Sensex and Nifty 50 indices plunging over 2%, marking the fourth consecutive day of losses. This sell-off was driven by a confluence of factors, including heightened geopolitical tensions in the Middle East, the bullishness in the Chinese market, and rising crude oil prices, all of which dampened investor sentiment.
The most prominent factor contributing to the market's decline was the escalating conflict between Iran and Israel. Iran's missile strikes against Israel, followed by Israeli Prime Minister Benjamin Netanyahu's vow of a strong response, ignited fears of a full-scale war in the region. This uncertainty left global investors on edge, prompting them to reduce their risk exposure.
Further exacerbating the situation was the surge in Brent crude oil prices, driven by concerns that the conflict could disrupt oil supplies. With energy facilities in the Middle East potentially being targeted by Israel or its allies, investors anticipated a potential supply shortage, pushing Brent crude prices to nearly $75 a barrel. The prospect of an oil price spike poses a significant risk for oil-importing nations like India, potentially further impacting the economy.
Adding to the market's woes was the recent clampdown on derivatives trading by the Securities and Exchange Board of India (SEBI). SEBI introduced new measures on October 1 aimed at reducing speculative trading in index derivatives, particularly on contract expiry days. While these measures were intended to curb market volatility, they raised concerns about liquidity in the derivatives market, potentially hindering trading volumes by 30-40 percent.
Adding to the pressure on Indian equities was the sharp rebound in Chinese stocks, driven by recent stimulus measures. This prompted fears among investors that Foreign Portfolio Investors (FPIs) and Foreign Institutional Investors (FIIs) might shift their focus from India to China, seeking to capitalize on the rally in the Chinese market. This concern was amplified by the relatively high valuations of Indian equities compared to their Chinese counterparts.
Finally, profit booking also contributed to the market sell-off. Following a prolonged bull run in Indian equities, investors may have seized the opportunity to lock in their gains, particularly in the mid-cap and small-cap segments, where valuations had reached elevated levels. Any potential downturn, whether driven by domestic or global factors, tends to trigger profit-taking behavior among investors.
While the market experienced a significant correction, experts suggest that the near-term trend remains corrective, indicating potential for a pullback. Nevertheless, caution is advised, with the possibility of further selling pressure on pullback moves. The situation remains fluid, with global geopolitical tensions and economic uncertainties likely to continue influencing market sentiment in the coming days.
Source: Bears grip D-Street as Nifty, Sensex crack 2%; here's 5 reasons behind today's sell-off