After several years of a stunning rise, the Indian stock market has plunged over the past five months, triggering panic among investors.

The benchmark indices Sensex and Nifty have fallen about 15% from their record highs in late September, wiping out nearly all gains made since May.

What is troubling for most investors is that it is still unclear when the market will entirely arrest its slide.

What triggered this crash?

Author Vivek Kaul, who writes on investments and the economy, explained that the basic reason for the crash was straightforward: the overvaluation of stocks.

“The valuations of many Indian stocks were totally out of [touch] with reality with the current earnings [of companies] and the possibility of future earnings,” he told Scroll. “Essentially, that reality has caught up with the stock market.”

Analysts have also pointed at foreign institutional investors selling their holdings as one of the factors leading to the slide. FIIs are large entities, such as mutual funds and sovereign wealth funds, that invest in countries other than where they are based.

They have pulled out nearly Rs 2 lakh crore, or $23 billion, from the Indian stock market since October.

What triggered this?

“If you look at the data over the last couple of years, before they started pulling out, they hadn’t been investing much,” Kaul said. “So the bulk of their buying actually happened in 2020-’21, when they bought stocks worth Rs 2.74 lakh crore.”

Kaul explained that the valuations were “very interesting” in 2021 because the stock prices had fallen “majorly once the markets started to realise the fact that the [Covid-19] pandemic was there to stay”.

“Once valuations sort of hit extremely high levels, they sold,” he said.

Kaul added: “If you look at the history of how FIIs have behaved in the past, they typically buy when the valuations are low, which is when the domestic investors sell, and they essentially do not buy and sometimes they sell when the valuations are high.”

There have also been other factors at work, Kaul said, pointing to how the Indian rupee had depreciated against the US dollar, which lowers the returns for FIIs.

The rupee closed at 86.9 per US dollar on Friday from Rs 83.9 six months ago. It had breached the 87-mark in February amid a slump in Asian currencies after US President Donald Trump’s new tariffs.

There are broader factors at play as well. The stock market crash has come at a time when the Indian economy has slowed and consumption – considered the “mainstay of the Indian economy” – has fallen. A recent industry report stated that around one billion Indians, or two-thirds of the country’s 1.4 billion population, do not have the income to spend on discretionary goods.

The situation in the market has exposed two false certainties that investors had followed, Kaul wrote in February. First, that the FIIs had been made redundant because the domestic retail investors were driving the prices. Second was the belief that the market can only rise.

The second is significant because there has been a boom in retail investors since the pandemic started. Demat accounts have more than quadrupled in the last five years. The new retail investors, during this period, have only seen the market rise.

Also read:

Here is a summary of the week’s top stories.

The delimitation debate continues. Tamil Nadu Chief Minister MK Stalin urged his counterparts in seven states to form a joint action committee against the Union government’s proposed delimitation exercise to redraw parliamentary constituencies. He invited them to a meeting in Chennai on March 22, warning that states with successful population control would be unfairly penalised with reduced Lok Sabha representation.

Congress leader Jairam Ramesh supported Stalin, declaring that states excelling in family planning should not be disadvantaged. The Tamil Nadu Assembly passed a resolution against the exercise in February 2024, amid concerns that it could favour northern states. Stalin recently claimed that Tamil Nadu could lose eight Lok Sabha seats on account of the exercise, based on population, though Union Home Minister Amit Shah later denied this.

At an all-party meeting in Chennai on Wednesday, the Dravida Munnetra Kazhagam, the Congress, the Left Front and the Opposition All India Anna Dravida Munnetra Kazhagam united to oppose delimitation. The Bharatiya Janata Party and a few regional parties boycotted the event. Stalin called for the 1971 census to remain the basis for seat allocation for the next 30 years.

The Manipur conflict. The police said that more than 1,000 weapons were surrendered during the two-week amnesty for returning looted and illegal weapons in the state, which ended on Thursday. Since May 2023, Manipur has been mired in an ethnic conflict between the Meitei and the Kuki-Zo-Hmar communities that has left at least 258 dead and displaced more than 59,000.

About 6,000 weapons were reportedly looted from state armouries after the conflict began. About 1,200 of these weapons had been recovered earlier in security operations. They include handguns, machine guns, grenades, mortars, Indian Small Arms System rifles and AK-56 rifles. Bulletproof jackets, helmets, radio sets, camouflage uniforms, boots and locally made mortars have also been surrendered.

On February 27, armed Meitei group Arambai Tenggol surrendered 246 weapons in Imphal, marking the largest set of illegally-held weapons surrendered in Manipur since the conflict began. On February 28, the governor extended the deadline to return looted weapons till Friday after groups demanded more time to surrender them.

Rokibuz Zaman writes: Does Arambai Tenggol’s decision to surrender arms reflect a changed reality in Manipur?

Political storm. Nationalist Congress Party leader Dhananjay Munde resigned as a Maharashtra minister after his aide Walmik Karad was accused in the murder of Beed sarpanch Santosh Deshmukh.

Munde cited health reasons but said he was pained by photos that were circulated widely online on Monday showing Deshmukh being assaulted. The photos were part of the chargesheet in the murder case. “It has been my firm demand since day one that the accused… should be given the strictest punishment,” Munde said.

Chief Minister Devendra Fadnavis accepted Munde’s resignation. Deputy Chief Minister Ajit Pawar said Munde stepped down on moral grounds. The Opposition had been demanding his removal. Deshmukh was abducted and killed in Beed district in December. Karad, a former Nationalist Congress Party corporator, surrendered last year, claiming he was framed.

Also on Scroll this week

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