Why have Indian stock markets crashed, and what is likely to happen next

The BSE’s benchmark Sensex fell sharply in the early trading hours of Monday due to a number of factors, including the Russia-Ukraine conflict, China’s economic growth, an increase in Covid-19 cases, and the impending US Federal Reserve rate hike.

The BSE’s benchmark Sensex fell sharply by 1,280 points, or 2.2 percent, in early trading hours Monday, under pressure from persistent global inflation concerns, expectations of a faster pace of US Federal Reserve rate hikes, and concerns about the Chinese economy’s weakness, in addition to the rising Covid-19 cases.

While the Sensex fell up to 2% on Monday, other major Asian markets also fell sharply. Japan’s Nikkei fell up to 1.9 percent, while China’s Shanghai Composite fell up to 1.3 percent.

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Why did Indian stock markets decline?

Indian markets, which reopened after a four-day hiatus, fell sharply in response to growing concerns about a variety of developments, including the ongoing Russia-Ukraine conflict. Concerns have also been expressed about the European Union’s embargo on Russian gas and the possibility of sanctions on Russian crude oil in the EU’s next round of sanctions.

As long as inflation remains a major concern, the market expects the US Federal Reserve to accelerate the pace of rate hikes; instead of a 25 basis point hike, experts believe the Fed may opt for a 50 basis point hike.

While rate hikes were anticipated, a sharp increase could result in a greater outflow of funds from foreign portfolio investors, putting pressure on emerging economy and domestic equity markets.

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The Chinese influence

Another factor affecting market sentiment is concern about the rise in Covid-19 cases in China, as well as the Chinese economy growing at a slower pace than expected.

Shanghai has been on lockdown since March, but on Monday, the city reported three deaths.

Indian stock market
Indian stock market

Meanwhile, AFP reported that China’s economy expanded by 4.8% in the first quarter, despite a Covid revival dampening economic activity. According to AFP, the National Bureau of Statistics also warned of “significant difficulties and challenges” ahead.

According to experts, China’s restrictions are likely to wreak havoc on global supply chains, further escalating inflation, which has already been impacted by the Russia-Ukraine conflict.

What does the future hold for Indian markets?

Given the global environment characterised by geopolitical tensions and inflation, equity markets are likely to remain volatile in the near term. FPI flows may remain volatile and may even reverse course in response to the US Federal Reserve’s expected acceleration of rate hikes. Even domestic inflation, which reached 6.95 percent in March, continues to worry Indian markets. Continued inflationary pressures may compel the RBI to pursue faster rate hikes as well.

The RBI’s recently released monetary policy statement signalled a shift away from stimulating growth and toward mitigating inflation risks. While it kept policy rates unchanged for the time being, it hinted at a future hike in repo rates. “Inflation has now surpassed growth in terms of priority. “The time has come to put inflation ahead of growth,” RBI Governor Shaktikanta Das stated following the release of the bimonthly policy review.

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