In the month of August the benchmark indices of NSE and BSE hit their respective lifetime highs. Nifty made a lifetime high of 11738 and that for the Sensex was 38896. Then what happened was unexpected, but feared by all. Market Crash!
Nifty declined by 15% to a level around 10000.
Sensex declined by 14% to a level around 33700.
Why the market had such a steep fall, in a very less time interval. And after that crash why the market hasn’t rose up?
1. FII SELLING:
In previous four years Indian market has been the best emerging market in terms of return. The funds which Indian market has received in last four years have now started going out. These funds are very important in taking the market upwards. But, due to the outflow of these funds, the market is now going down.
During the start of the previous year, outflow of funds started. But, in spite of that outflow, market achieved its lifetime high. It was due to the buying of DIIs.
Now as the buying of DIIs have also been reduced. And the global scenario also is not looking favourable due to the trade war. So, the market is finding it tougher to scale up.
As per the chart the FIIs have sold holdings worth rupees 75,711 crores during the previous year. The DIIs have bought worth rupees 1,11,687 crores. Due to the selling of FIIs the market has been highly volatile.
2. POLITICAL UNSTABILITY:
The bull run of market has been primarily due to the financial reforms of the government. In spite of getting certain setbacks in shorter term, demonetisation and GST being the important ones among them.
But both of them proved beneficial in the longer horizon. As demonetisation helped in increasing the tax collection. And GST helped in improving the ranking of India in the index of “EASE OF DOING BUSINESS”.
And now as the elections are nearing in. The chances of change in government and also the instability caused is weighing over the bullishness of market.
In the near future the market does not seem to get a long bull run, due to unstable political governance. However what the traits of market are, it symbolises of the market being range bound.
3. PROFIT BOOKING:
Profit booking refers to the phenomenon of the individual or institutions cashing out their positions to earn profit. It also signifies selling of stocks to get money. This usually happens when the target prescribed is achieved.
Imagine the index scaling to its lifetime high and stocks reaching their new highs. What a good opportunity of earning profits from the market. This feeling germinated the selling of stocks. The selling of stocks made it tougher for the index to move up thereafter. Eventually, the indices could not handle this selling pressure and thus tumbled down.
4. CRUDE OIL:
The variation of stock market is inversely related to the price of crude oil. The surge in price of crude oil plunges the stock market. As with increase in crude oil the transportation cost of the companies increases. This increase causes a decrease in the profit of companies.
As the stock price of a company is the replica of its financial performance. So as the financial performance of a company deteriorates its stock prices plunges down.
The picture given below clearly depicts the movement of crude oil with respect to the nifty. The blue line represents the crude oil price and red one represents the nifty. The strength of movement is shown below.
From the picture it is clear whenever the price of crude oil goes up the nifty declines. And with decline in crude oil price the nifty surges up. The crude oil has its effects in almost all the companies of the different sectors. So, the stocks of companies of different sectors fall when the crude price increases.
So these were some of the key factors for the crash of market in the second half of 2018.