Global Factors that lead to fall in Indian Stock Market

On 1 August 2024, the Indian stock market touched a lifetime high of 25,078. In less than a week, the Nifty50 corrected over 1000 points, and on 6 August, it ended below 24,000. It has corrected roughly 4% in no time. Stock markets across the globe have corrected significantly in the last week. For the Indian market, the selloff is led by global factors. Let us look at different factors that lead to falls.

Stock Market Scenario

The stock market correction is global as the US, Japan, and other major markets have fallen significantly. In India, the selloff is across the sectors and categories. The banking and auto sectors are the most affected in the recent fall. Let us look at all the sectors and how much they have fallen since 31 July 2024.

Indian Rupee Present Valuation

It is not only the stock market. The Indian rupee has also fallen considerably against the dollar. The Indian rupee closed at a record low against the US dollar on Tuesday. The rupee was weighed down by foreign fund outflows from the Indian stock market, and the unwinding of carry trades amid the US recession fears that shocked global financial markets.

On Tuesday, Rupee hit an all-time low of 83.96 per dollar before closing at 83.9525, down 0.1% from its close of 83.8450 in the previous session. The dollar index was down about 0.5% to 102.6, its lowest since March.

As per a report published by Morgan Stanley, the Indian rupee could fall to 85.2 against the US dollar during the second half of 2025.

*6 August, 2024

Key Factor that contributed to a dip in the Indian stock market

Several factors/events have led to a current dip in the Indian stock market. However, the major reason for the fall can be linked to recent monetary policy change in Japan. Let us understand this event in detail.

For over 30 years, Japan has maintained zero interest rates. In fact, until March 2024, the interest rates were negative. Many organizations, funds, and hedge funds took advantage of this by borrowing large amounts from Japan and investing it in the US markets.

Additionally, since the investment was substantial, most hedge funds shorted the Yen to hedge their positions. For this reason (zero interest rates), Japan is the largest investor in US markets.

Last week, the JCB (Japan Central Bank) decided to raise interest rates by 25 bps after almost 30+ years. Now, zero-interest money is no longer zero-interest, and there is an additional cost on all existing loans. Hence, most of the funds that had taken this free-interest loan and invested it in the US market started selling everything to get the money and close the loan.

Other reasons that contributed to the fall

• US Recession Fears: Investors are worried about a possible US recession. This fear grew stronger after recent job numbers showed that unemployment in the US is rising for the fourth month in a row. This is bad news because it suggests the US economy might be slowing down, which could lead to a recession.
• War Fear: Over the weekend, Israel killed Hamas political chief Ismail Haniyeh. Now, Iran has decided to take revenge for this act. The tension on the two sides has increased the chances of potential war. The stock market always fears war as it can have a cascading effect if major economies get impacted directly or incorrectly by the war.
• Valuation Concern: The Indian stock market jumped from 23,000 to 24,000 in no time. Nifty50 went from 23,000 to 24,000 in 23 days (second fastest 1000-point rally) and 24,000 to 25,000 in 24 days (third fastest 1000-point rally). The current valuations are high, especially in the small and mid-cap segment. The overvalued segment was bound to correct, and now the market has a reason to correct.

Sectorial analysis

Auto Sector: The Nifty Auto index closed has fallen significantly recently. The Auto sector major Tata Motors has led to the recent fall in the sector. Tata Motors is expecting constrained production in the second and third quarters of the financial year 2024-25 due to the shutdown of the annual power plant and floods affecting its key aluminum supplier.

Metal Sector: The Indian metal stocks will continue to suffer from the conflict between the downturn in the West and expectations for a Chinese resurgence. As per reports, steel margins will remain under pressure in Q1FY25, but recovery will come in the second of the current financial year. The recent correction in metal stocks has made them attractive.

PSU Banks: The index is down 7% over the last one month. Among the index constituents, Punjab & Sind Bank shed 3.04%, Bank of India slipped 2.80%, and Indian Bank was down 2.69%. The Nifty PSU Bank index is up 55% over the last one year compared to the 22.43% surge in the benchmark Nifty 50 index. Any correction in the broader index will lead to substantial correction in PSU Bank stocks because they have given excellent runup in the last one year.

Way Ahead

In the last couple of years, the Indian market has not seen any noticeable correction. Every time the market fell by a few percentage points, it bounced immediately. Buy the dip strategy worked perfectly well.

This time around, the fall or correction is led by multiple factors. Therefore, it could be different - the market could see a proper correction (fall of 10% or more). Some key events investors should look forward to are inflation numbers, rate hike news, and geopolitical events. The market may fall considerably if anything unexpected happens related to these points.

The good news for the Indian stock market is that it is no longer FII inflow dependent. Retail and domestic investors continue to invest in the market, and we are hitting new records in monthly SIP. The fact that the Indian market fell the least among major economies in the last few trading sessions should give confidence to investors.

Before you go

The stock market correction was long due, and this correction allows investors to invest in quality stocks at better valuations. However, investors should stay cautious as the fall can be even more.