Stock Market Crash: Israel-Iran war to FII outflows—5 reasons why Sensex, Nifty plunged today amid volatility

admin August 29, 2023

The Indian stock market experienced a sharp decline today, with both the Sensex and Nifty witnessing a significant plunge. Investors were left reeling as global uncertainties and domestic challenges compounded to create a day of volatility in the financial markets. The benchmark indices Sensex and Nifty have seen a drop of over 2%, wiping out a substantial portion of investor wealth in a single trading session. The steep correction has been attributed to multiple factors, both external and internal, including geopolitical tensions, economic data releases, and market dynamics. This article will provide an in-depth explanation of the five key reasons that triggered the stock market crash today, along with the potential implications for investors and the broader economy. The foremost external factor rattling the global financial markets today was the escalating tensions between Israel and Iran. After years of underlying friction, the situation reached a boiling point, raising concerns of a broader conflict in the Middle East, one of the world’s most geopolitically sensitive regions. The Israel-Iran conflict holds significant global implications due to the Middle East’s strategic importance in the global energy supply chain. The region is home to nearly a third of the world’s crude oil production. The mere hint of military escalations between key nations in the region can send shockwaves through the global markets, particularly in terms of oil prices. The heightened tensions have led to a surge in crude oil prices as markets anticipated potential disruptions in oil supply. Brent crude prices spiked above $100 per barrel, further stoking inflation fears across the globe, including in India, which is heavily reliant on imported oil. Rising oil prices not only impact the energy sector but also increase input costs across industries, from manufacturing to transportation, adding pressure on corporate profitability. For India, which imports more than 80% of its oil needs, the sharp increase in crude prices poses a twin challenge: rising import bills and a weakening currency. Higher oil prices exert inflationary pressure on the economy, reduce consumer spending, and affect corporate earnings, all of which have a negative impact on the stock markets. The uncertainty surrounding the Middle East conflict has spooked investors, leading to large-scale sell-offs across sectors, contributing to the crash in Sensex and Nifty. Another significant factor behind today’s market plunge was the sustained outflow of capital by Foreign Institutional Investors (FIIs). FIIs have been net sellers in Indian equities for several weeks, and the trend continued with heavy selling today. There are multiple reasons why FIIs are pulling out from Indian markets. First, the uncertainty surrounding global geopolitics, particularly in the Middle East, has led to risk aversion. Investors are preferring safe-haven assets such as U.S. treasuries and gold, leading to an exodus from emerging markets like India. Second, rising bond yields in developed economies, especially in the U.S., have become more attractive to global investors. As the U.S. Federal Reserve continues its tightening cycle with higher interest rates, Indian markets have become less appealing in comparison to the more stable returns from U.S. bonds. This has triggered a flight of capital from Indian equities, putting downward pressure on the indices.

Finally, concerns over India’s macroeconomic health, including a widening fiscal deficit, slowing GDP growth, and persistently high inflation, have also contributed to the FII outflows. Investors are worried about the impact of these factors on corporate earnings and future growth, prompting them to reduce their exposure to Indian stocks. Compounding the impact of global factors is a series of weak domestic economic indicators. Several key data points released in recent weeks have pointed to a slowdown in economic activity, further dampening investor sentiment. Inflation continues to be a major concern for the Indian economy. The Consumer Price Index (CPI) has remained elevated, driven largely by rising food and fuel prices. The recent spike in crude oil prices has added to the inflationary pressures, leading to concerns about reduced purchasing power and slowing consumer demand. With inflation threatening to remain stubbornly high, investors fear that the Reserve Bank of India (RBI) may have limited room to cut interest rates in the near future, which would be a negative for growth-sensitive sectors such as banking, real estate, and consumer goods. India’s industrial output, measured by the Index of Industrial Production (IIP), has shown signs of deceleration. The latest IIP data revealed lower-than-expected growth in key sectors such as manufacturing, mining, and electricity. This has sparked concerns about the strength of the Indian economy’s recovery post-pandemic. Slower industrial output growth translates into lower corporate profits, which has had a direct impact on the stock market, especially in sectors like infrastructure, construction, and capital goods. The global stock markets have also been in turmoil, and India is no exception. Major indices across the globe, including the Dow Jones, S&P 500, and Nasdaq, have been experiencing sharp corrections in recent sessions. This global sell-off is largely driven by fears of a potential recession, triggered by persistently high inflation and aggressive monetary tightening by central banks around the world. The U.S. Federal Reserve, in its latest statements, has maintained a hawkish stance on inflation, indicating that interest rates could remain high for a prolonged period. This has spooked global investors, as higher interest rates are generally seen as negative for equity markets. Higher borrowing costs reduce corporate profitability and slow down consumer spending, both of which can weigh on stock market performance. As the U.S. central bank signals further rate hikes, emerging markets like India are likely to see continued pressure due to capital outflows. Global investors typically move capital to safer, higher-yielding assets, such as U.S. bonds, during times of uncertainty. This shift away from riskier assets has exacerbated the sell-off in Indian equities. Lastly, today’s market crash can also be attributed to widespread profit booking by investors who had built up significant positions in recent months. The Indian stock market has seen a robust rally in 2024, with both Sensex and Nifty reaching all-time highs in the past few weeks.