Sensex plunges over 1,700 points: What triggered Monday’s stock market crash?

Benchmark stock market indices have slipped further after starting off the day on a weak note. It is one of the biggest market crashes in the past few months, leading to a loss of nearly Rs 10 lakh crore in investors’ wealth.

Domestic shares have slumped to their lowest in nearly four months following Monday’s massive plunge. The S&P BSE Sensex tumbled over 1,700 points or over 3 per cent at around 1:10 pm, while the Nifty was down over 535 points. It may be noted that there has been a sharp jump in volatility, with India’s VIX rising as much as 18 per cent.

Here are some factors that led to today’s stock market crash:

OMICRON THREAT INTENSIFIES

The threat arising from the rapid spread of the Omicron variant of coronavirus is the biggest factor behind today’s stock market crash. It is spreading like wildfire across many European countries after becoming the dominant strain in South Africa.

The rapid spread of the virus has again threatened global economic recovery, leading to weakness in stock markets around the globe. Several countries are planning to reintroduce restrictions to limit the spread of the new Omicron variant, while some nations like the Netherlands have already gone under a fresh lockdown.

Read | Sensex tumbles over 1,700 points as Omicron threat spooks investors

Experts feel that the Omicron variant has severely disrupted market momentum, leading to a correction in most stock markets, including India.

One of the reasons why the new variant has spooked investors is the fact that vaccines may be less effective against the highly mutated variant of Covid-19. Less than a month after its discovery, Omicron has become a dominant strain in many countries. India is also witnessing a sudden rise in Omicron cases, with over 150 cases already.

“The Omicron variant is also troubling the markets as its transmission is higher than other variants,” said Saurabh Jain, assistant vice president at SMC Securities in New Delhi, told news agency Reuters.

“The fall is also a result of continuous selling by foreign institutional investors. The rollback of liquidity by central bankers will have some kind of repercussions.”

HEAVY SELLING BY FIIs

Another reason that contributed to today’s crash is heavy selling by foreign institutional investors. FIIs have been persistently selling their holdings.

The nervousness among FIIs is not just a result of the new Omicron threat, but also hawkish central bank polices and rising global inflation. FIIs are also pulling out of the market due to rising volatility in the wake of a possible global economic slowdown.

WEAK GLOBAL CUES

Not just domestic markets, but the impact of the Omicron spread on global markets has been equally devastating.

Stock markets in China, US, Europe and other parts of the world have also fallen as the new coronavirus variant spreads rapidly across the globe.

The three main US stock indices ended in negative territory for the week after the US Federal Reserve said there will be at least three interest rate hikes in 2022 due to high inflation.

OTHER FACTORS

Equity markets in Asia and other parts of the globe could be witnessing a correction due to the hawkish stance taken by central banks in developed countries to combat rising inflation. Global inflation has witnessed a rapid rise over the past few months, prompting central banks to tighten policies.

The US Federal Reserve’s plan to hike interest rates starting in 2022 got an almost immediate response as many other central banks have raised rates to fight inflation. The Bank of England became the first major central bank to increase interest rates since the pandemic began. The central banks of some other countries have increased interest rates multiple times after the pandemic.

While India has not yet increased key interest rates, there are high chances that the Reserve Bank of India (RBI) will gradually start hiking key rates, given the fact that inflationary pressure is building up.

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