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The Indian stock market experienced a significant downturn over five trading sessions, resulting in a staggering loss of ₹16.97 lakh crore (approximately $203 billion USD) for equity investors. This dramatic decline, characterized by a 3% fall in benchmark indices BSE Sensex and Nifty50, was primarily attributed to a confluence of factors, both domestic and international. The steepest single-day loss amounted to ₹9.29 lakh crore, highlighting the volatility and fragility of the market during this period. This event underscores the interconnectedness of global markets and the vulnerability of emerging economies to shifts in US trade policy and global financial conditions. The sheer magnitude of the losses raises concerns about investor confidence and the potential for further economic repercussions.
One of the primary catalysts for this market crash was the US President's announcement of a uniform 25% tariff on steel and aluminum imports, eliminating all previously granted exemptions. This decision, while intended to bolster domestic industries, sparked immediate concerns about escalating trade tensions and potential retaliatory measures from affected countries. Countries like Mexico, Brazil, South Korea, and Vietnam, heavily reliant on steel and aluminum exports to the US, were particularly vulnerable to the impact of these tariffs. The uncertainty surrounding the consequences of this protectionist policy created a ripple effect, dampening investor sentiment globally, particularly in emerging markets like India which are heavily intertwined with the global trade system. This decision also affected metal prices, indicating a potentially long-term impact on related industries.
Adding to the market's woes was the prevailing anxiety surrounding Federal Reserve Chair Jerome Powell's address to the Senate. Investors eagerly awaited his statements on tariffs and inflation, hoping for clarity on the potential direction of monetary policy. Any indication of further interest rate hikes or a hawkish stance by the Fed could have exacerbated the market's downward trajectory. The anticipation surrounding this address underscored the crucial role played by central bank policies in shaping global market sentiment and their considerable power to influence investor behavior. This highlights the importance of transparent and predictable policy measures, particularly in times of economic uncertainty.
Further fueling the market decline was the persistent outflow of foreign institutional investor (FII) funds. NSDL data revealed a substantial withdrawal of $9.94 billion from Indian equities during the current year. This capital flight, driven in part by the strengthening US dollar and rising US Treasury yields, added pressure on the Indian rupee and contributed to the overall market volatility. The attractiveness of higher-yielding US investments, coupled with the increased cost of investing in emerging markets due to a strong dollar, resulted in a significant shift in global capital flows away from India. This outflow demonstrates the vulnerability of emerging markets to fluctuations in global capital markets and the challenges in attracting and retaining foreign investments in an environment of increasing global uncertainty.
The rising US 10-year Treasury yield (4.495%) and 2-year yield (4.281%) further contributed to the negative sentiment. These higher yields made US bonds more attractive to investors seeking safe haven assets, drawing capital away from riskier emerging markets. The robust dollar index at 108.36 also played a role, increasing the cost of investing in other currencies and further incentivizing capital repatriation to the US. This situation reinforces the significant influence of US monetary policy and economic conditions on global markets, highlighting the need for emerging economies to develop robust internal economic strategies to mitigate the impact of external shocks.
Domestic concerns also played a significant role. Poor domestic earnings reports and ongoing economic growth concerns added to the negative market sentiment. Mid- and small-cap stocks, often more vulnerable to shifts in investor sentiment and economic conditions, experienced particularly sharp declines, reflecting anxieties about demand and valuations. The impact of these domestic factors highlights the importance of maintaining a stable and healthy domestic economic environment to support market resilience and investor confidence. A strong domestic economy acts as a buffer against external shocks and allows markets to better weather global economic uncertainties. This emphasizes the crucial need for sound economic policies and regulatory frameworks.
In conclusion, the Indian stock market's recent crash was a complex event driven by a confluence of international and domestic factors. US trade policy uncertainty, particularly the imposition of steel and aluminum tariffs, played a pivotal role, along with anxieties surrounding Federal Reserve policy and persistent foreign capital outflows. Weakening domestic sentiment and economic concerns further exacerbated the situation, highlighting the interconnectedness of global markets and the challenges faced by emerging economies in navigating a turbulent global environment. The sheer magnitude of the losses underscores the need for careful policy management both domestically and internationally to foster greater market stability and investor confidence.
Source: Stock market crash: Equity investors lose Rs 16.97 lakh crore in just 5 days