“The stock market is not for everyone.” A statement which might appear absurd but is indeed true. Though this market offers the opportunity to earn short or long term gains, not everyone can invest in these. Owing stocks is a high-risk investment. If the business faces financial difficulties, legal problems or other issues, its stock is likely to be affected, fall and consequently, also pull down all investors in the company. According to data, only about 2% of the total population of India invests in the stock market. The myths related to the stock market also discourage investment.
According to the United Nations Millennium Development Goals (MDG) programme, 80 million people out of 1.2 billion Indians, roughly equal to 6.7% of India’s population, lived below the poverty line of $1.25 in 2018–19. In a country where such a high proportion of people are below the poverty line, it is difficult to invest in the high risk-high return market. The investors might not be able to predict the changes and end up losing a large proportion of the investment. Something similar happened in May this year.
Sensex, the benchmark index of BSE (Bombay Stock Exchange) in India comprises the 30 largest, well-established and most actively traded stocks. It is float-adjusted, market capitalization-weighted and provides and acts as an indicator of the Indian economy. However, this Sensex of the financially sound companies has been crashing. The Equity indices plunged with BSE Sensex crashing with an 1100 point sell-off. This eroded the investor’s wealth by more than Rs 5 lakh crore, with their losses amounting to Rs. 34 lakh crore since 11 April 2022. According to the data, BSE m-cap fell by Rs.5.26 lakh to Rs.241.05 lakh crore. It was recorded as high as Rs.275.17 lakh crore on April 17. This situation began with the inflation data released by the US.
The Sensex crashed due to many key factors. The primary reason is the US inflation estimates. According to the data, the US Consumer price index eased to 8.3% against the estimates of 8.1%. This implies that inflation in the world’s largest economy might have peaked, however, easing would be a slow process. The Russia-Ukraine war has also played a pivotal role in intensifying the situation. Reduced supplies of the commodities exported by both the countries have driven the prices up sharply, thus increasing inflation. Another factor concerning the prior one is the rising dollar market and falling Asian market. The dollar stood at a two-decade high due to the inflation reading. On the other hand, most Asian stocks were trading in the red. It means that they were trading lower than when it opened. Reliance Industries, HDFC, Bajaj Finance and Bajaj Finserv fell between 2 per cent and 3 per cent.
The next key factor is the increasing FPI (Foreign Portfolio Investor) outflows. FPI outflows have been as high as Rs 17,403 crore in May and have touched Rs 1,44,565 crore in 2022 so far. The FIIs (Foreign Institutional Investors) is estimated to be selling till the Indian valuation becomes as attractive as the dollar index at 104. Along with this is India’s recent CPI readings. According to the Ministry of Statistics and Programme Implementation, inflation was recorded at 7.79%, the highest since May 2014. Food inflation also accelerated to 8.38%, continuously accelerating for the 7th month in a row. This increases spending and reduces the savings of people each month. At that time the consumer cuts back on spending because basic expenses are too high. It means lower earnings for public companies and lower prices for their stocks. Ultimately this shows a negative impact on the stock market.
To conclude, due to the global scenario around geopolitical concerns and inflation, equity markets are likely to remain strained in the near term. The FPI may remain unstable and is expected to witness an outflow still. Furthermore, RBI recently increased the repo rate to 4.40%. The Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds. The money supply will ultimately reduce due to the high repo rate, thus slowing down the inflation. To summarize, the investors will have to act patiently, analyse the present scenario, predict the changes and act accordingly. The situation worldwide is unfavourable and it will take time for everything to get on track.
- Rupee hits all-time low, Sensex crashes over 1,100 points. (2022). Retrieved 22 May 2022, from https://www.indiatoday.in/business/story/rupee-hits-all-time-low-sensex-crashes-over-1-100-points-1948626-2022-05-12
- Explained: Why Indian markets have crashed, and what is likely to happen next. (2022). Retrieved 22 May 2022, from https://indianexpress.com/article/explained/market-crash-sensex-nifty-india-inflation-7874188/
- India Inflation Rate – April 2022 Data – 2012-2021 Historical – May Forecast. (2022). Retrieved 22 May 2022, from https://tradingeconomics.com/india/inflation-cpi
- Why The Stock Market Is Not For Everyone. (2022). Retrieved 22 May 2022, from https://www.streetdirectory.com/travel_guide/36529/investment/why_the_stock_market_is_not_for_everyone.html
- Mudgill, A., & Chadha, M. (2022). Rs 5 lakh crore gone! 4 factors behind Sensex crash today. Retrieved 22 May 2022, from https://economictimes.indiatimes.com/markets/stocks/news/rs-5-lakh-crore-gone-4-factors-behind-sensex-crash-today/articleshow/91508132.cms
- What is Repo Rate? Definition of Repo Rate, Repo Rate Meaning – The Economic Times. (2022). Retrieved 22 May 2022, from https://economictimes.indiatimes.com/definition/Repo-rate