The BSE Sensex fell more than 1,200 points in the morning on Tuesday, the sixth straight session of loss for the market. The market closed on Monday evening at 34,757.16 points, which was already a three-week low. It ended up trading at nearly 2.95 per cent lower, at 33,732.48 points on Tuesday morning. It touched a low of 33,482.81 points — down by 1,274 points — during the day.
The BSE Sensex was not the only market that crashed suddenly. Japan’s Nikkei, South Korea, Taiwan and Australia all lost points. “Nikkei tumbled as much as 5.6per cent while Taiwan shares lost 5.3 per cent at one point. Australian shares dropped 3 per cent to their lowest since October while South Korean shares fell 3 per cent,” reported Reuters .
But why did the markets tumble? There are several reasons for this.
A Wall Street plunge
American stock market indices like the Dow Jones Industrial Average and the Standard & Poor 500 plunged on Tuesday morning. According to Reuters , the two indices fell nearly 4 per cent . Dow had its biggest intraday decline in its history ever, falling 1600 points. The declines for the two were also the biggest single-day percentage drops since August 2011.
“Before Monday's fall, the index had not seen a pullback of more than 5 per cent for more than 400 sessions, which analysts said was the longest such streak in history,” Reuters reported.
Such a drastic fall in the U.S. stock market also meant that other global markets followed suit.
So why did the U.S. markets fall?
The U.S Federal Reserve, that country’s central bank, has been giving out indications that it might hike the benchmark interest rates, even though it left the rates unchanged recently at the last meeting chaired by Janet Yellen, the Reserve’s outgoing Chairwoman.
The interest rates are the rates at which the Reserve lends money to the other banks. A jump in the interest rate means that banks may hike interest rates themselves, passing the cost on to the customers. This will make loans and credit cards costlier, affecting companies’ financial performance as they have to pay more as interest costs, while also slowing down investment and expansion.
Higher interest rates also affect stock markets indirectly by reducing consumer spending. The higher rates generally encourage more savings and less borrowing in the economy, which leads to a dip in consumption and lower revenues for companies. Since share prices are directly influenced by how companies perform financially, higher interest rates are generally badly received by stock markets.
The Associated Press recently reported that the central bank expected the steadily strengthening economy to warrant further gradual increases in its benchmark rate.
Market course correction
This sudden fall in the markets can also be due to the fact that stock prices have been steadily rising — a nine-year bull run, according to Reuters . “The U.S. stock market has climbed to record peaks since President Donald Trump’s election, on the prospect of tax cuts, corporate deregulation and infrastructure spending, and it remains up 23.8 per cent since his victory,” Reuters reported .
A course correction is usually started by a sell off. In this case, the trigger was the rise in U.S. bond yields and the rate of increase of U.S. wages, which in turn “raised an alarm about higher inflation and potentially higher interest rates”.
Tax on Long Term Capital Gains
In the Indian markets, the decline may also be due to last week’s budget proposal of 10 per cent long-term capital gains (LTCG) tax on equities. According to The Hindu ’s Ashish Rukhaiyar, “LTCG or long-term capital gains refer to the gains made on any class of asset held for a particular period of time. In case of equity shares, it refers to the gains made on stocks held for more than one year.”
Now, all investors who trade on stock exchanges would be required to pay the LTCG tax, which would explain the fall in the market. In addition, there are also expectations of a possible increase in the RBI repo rate , to stave off fears of inflation.
However, Finance Secretary Hasmukh Adhia has pointed fingers to the global markets. “It is very unfortunate that our move came in at wrong time because of global markets also going down. There is a strong connection of all equity markets. The MSCI all country index of equity markets went down by 3.4 per cent in last week, especially on Thursday and Friday”, PTI reported Mr. Adhia as saying on Monday . “If the entire world index has gone down by 3.4 per cent, naturally it would have ripple effect on Indian stock market also. It is not LTCG tax effect,” he said.
