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The Indian stock market experienced a significant downturn over three consecutive trading sessions, culminating in a substantial drop for the Sensex and Nifty 50 indices. The Sensex closed 502 points lower on Wednesday, December 18th, representing a 0.62% decrease, settling at 80,182.20. The Nifty 50 also declined, closing at 24,198.85, a 0.56% drop. This three-day decline resulted in a total loss of 1,951 points for the Sensex, significantly impacting investor wealth. The overall market capitalization of BSE-listed firms decreased by approximately ₹6 lakh crore, underscoring the severity of the market correction. The impact extended beyond blue-chip stocks; midcap and smallcap indices also suffered considerable losses, indicating a broad-based sell-off across the market. Sectoral indices mirrored the negative trend, with notable declines in media, PSU banks, private banks, and metal sectors. However, the Nifty Pharma and IT indices showed some resilience, demonstrating sector-specific variations in performance. This sharp decline prompts a deeper analysis into the underlying factors contributing to this market volatility.
Experts have identified several key reasons for the recent market downturn. One prominent factor is the anticipation surrounding the US Federal Reserve's (Fed) policy decision. The Fed's two-day policy meeting concluded on December 18th, with a widely expected 25 basis points rate cut. However, market participants keenly awaited the updated economic projections and the “dot plot,” which illustrate individual FOMC members' interest rate expectations. These projections will shape expectations for the Fed’s interest rate trajectory through 2025 and 2026. Concerns remain about inflation's persistence and its potential impact on the Fed's future actions. While a rate cut was expected, any indication of a more cautious approach to future cuts, or a less aggressive outlook than previously anticipated, could dampen market sentiment. The Fed's communication is crucial as it influences global financial markets and investor confidence.
Another significant factor contributing to the market fall is the weakening Indian rupee. The rupee reached a record low against the US dollar on Wednesday, December 18th, reaching 84.95 per dollar. This weakness adds to existing concerns about a potential economic slowdown. A weakening rupee can accelerate foreign capital outflow, as foreign institutional investors (FIIs) may find it less attractive to invest in Indian assets. This outflow further exerts downward pressure on the market. The expectation is that the rupee's weakness may persist, potentially exceeding the 85 per dollar mark. Analysts are monitoring various factors such as the current account balance and housing data from the US to assess the rupee's future trajectory. The US dollar's strength and continuing FII outflows are expected to continue influencing the exchange rate, creating uncertainty in the market. This currency volatility adds another layer of complexity to the already challenging market conditions.
Beyond the immediate factors of the US Fed's decision and the weakening rupee, other contributing elements are at play. These include global macroeconomic uncertainties, geopolitical tensions, and domestic factors such as inflation and interest rates. Global growth concerns and the ongoing war in Ukraine contribute to a volatile investment climate. These broader geopolitical risks influence investor sentiment and capital flows, impacting emerging markets like India. Domestically, inflation and interest rate movements also influence market behavior. While interest rate hikes might seem to help curb inflation, they simultaneously impact businesses and investor confidence. The delicate balance between controlling inflation and stimulating economic growth requires careful navigation by policymakers, and this dynamic often affects market sentiment and investment decisions.
The three-day market downturn serves as a reminder of the interconnectedness of global and domestic economic factors, highlighting the challenges and complexities of the Indian stock market. The interplay between global events like the US Fed's policy decisions, currency fluctuations, and domestic economic conditions significantly influences investor behavior and market trends. The volatility underscores the importance of diversification, risk management, and a long-term investment perspective. While short-term fluctuations are inevitable, a comprehensive understanding of the underlying drivers and a well-informed investment strategy are crucial for navigating market uncertainty and mitigating potential losses.
Source: Sensex crashes 2,000 points in 3 days; 5 factors why Indian stock market is falling