A stock market crash happens when share prices drop suddenly due to global issues, financial instability, or investor panic. It can be triggered by economic crises, major events, or bursting market bubbles. Fear-driven selling makes things worse, dragging down indices like BSE Sensex and NSE Nifty. Knowing these reasons helps investors stay prepared and protect their money.
Why did the share market crash today?
The Indian stock market experienced a significant downturn today, and the following five key factors appear to be responsible:
1. Global selloff
Stock markets across the globe have plummeted, largely due to the Trump administration's unwavering stance on tariffs. President Trump described tariffs as "medicine" necessary to fix trade imbalances, expressing little concern about global market losses. This triggered widespread panic, with major Asian indices like the Taiwan Weighted falling 10% and Japan’s Nikkei dropping by 7%. The ripple effect was felt in Indian markets too, contributing to the broad-based decline.
2. Tariff impact still not priced in
The persistent uncertainty around tariffs, now affecting over 180 countries, has not yet been fully factored into market valuations. Indian equities are particularly vulnerable in this scenario. According to analysts at Emkay Global, there could be further market weakness in the first quarter of FY26, with the Nifty potentially falling to 21,500 due to earnings downgrades and derating caused by a likely US recession.
3. Fears of growth slowdown
The trade war sparked by the US tariffs is expected to push inflation higher, hurt company profits, dampen consumer sentiment, and slow down global growth. JPMorgan now pegs the chances of a US and global recession at 60%, citing the disruptive nature of US trade policies. While India may not be the primary target, the country cannot remain untouched. Tariffs directly impacting Indian exports have led global firms like Goldman Sachs and Citi to reduce India’s growth forecasts, reflecting anticipated economic strain.
4. FPI outflow resumes
Foreign Portfolio Investors (FPIs) have started offloading Indian equities once again, after a brief period of net buying. As of the latest figures, they’ve sold over Rs. 13,700 crore worth of shares this month, reflecting growing anxiety about the global economic outlook and India’s positioning in the ongoing trade dispute. Continued FPI withdrawal could further weaken domestic markets if diplomatic or economic resolutions aren’t reached soon.
Causes of a stock market crash
Stock prices are subject to complex factors that collectively influence the market dynamics of supply and demand. To address the pertinent query of “Why is the Indian stock market falling today?”, let us delve into these influencing elements.
1. Excessive leverage
Leverage, or the use of borrowed funds to invest, is a double-edged sword in the Indian stock market. It can magnify profits during bullish phases but proves perilous in bear markets. For instance, an investor in India borrowing Rs. 5,00,000 to purchase stocks worth Rs. 10,00,000 might see substantial gains if stock prices rise. However, during a downturn, even a 50% drop in share prices could result in a complete erosion of their equity, forcing them to sell assets to cover losses. The cascading effect of such forced selling often drags market indices lower, creating a negative feedback loop.
2. Rates of inflation and interest
In India, inflation directly influences the Reserve Bank of India’s (RBI) monetary policy. Rising inflation prompts the RBI to increase interest rates, leading to higher borrowing costs for companies and individuals. For example, an increase in home loan rates dampens real estate demand, which in turn impacts the stock prices of realty companies. Additionally, high inflation reduces consumer spending power, adversely affecting sectors like FMCG and automobiles. As a result, investors may lose confidence, leading to a broad market decline.
3. Political environment and policy uncertainty
Political events, such as general elections or sudden changes in government policies, play a significant role in determining stock market stability in India. Markets thrive on predictability, but events like unexpected reforms or geopolitical tensions can unsettle investors. For example, the announcement of demonetisation in 2016 or uncertainties surrounding tax regulations like GST implementation initially caused market turbulence. Similarly, border tensions or a weak coalition government can reduce foreign direct investment (FDI) inflows, dampening stock market performance.
4. Tax policy changes
The Indian stock market is sensitive to tax-related changes that affect investor returns and corporate profitability. For instance, the introduction of the Long-Term Capital Gains (LTCG) tax in 2018 initially dampened investor sentiment. Sudden changes in corporate tax rates or dividend taxation can also lead to volatility, as these policies directly impact corporate earnings and investor yields. Adjustments in Goods and Services Tax (GST) rates on key sectors often ripple through the stock market, influencing overall investor confidence.
A company’s fiscal well-being and ability to generate profits play a prominent role in whether the share market goes up or down. In addition, the broader economic landscape has a considerable impact on investor sentiment. Metrics like Gross Domestic Product (GDP) growth, unemployment rates, and inflation can influence the market’s mood. Alterations in interest rates directly affect borrowing costs for both companies and individuals. Also, the impact of company-specific events cannot be avoided. Announcements regarding product launches, mergers, acquisitions, shifts in management, or legal entanglements hold the potential to considerably impact a company’s stock price. Besides these, the global stage, rife with geopolitical events, international conflicts, and macroeconomic trends, introduces another element of unpredictability.
