All the traders and investors keenly observe every movement in the market. Like the soaring markets, the Stock Market Crash in India is also talk of the town. Thus, today we are going to discuss them at length.
Before that, let’s understand – what a stock market crash is.
An abrupt and rapid fall in the prices of the stock market is called a crash. This phenomenon can be triggered by an economic crisis, natural disaster, a catastrophic event, and other unforeseen incidents.
The market is also affected by external factors and other exchanges.
A crash creates panic among traders and investors. This panic leads to an increase in selling away the financial securities while bearing the losses. Undoubtedly, it contributes heavily to magnifying the effects of the crash.
Contrarily, many traders see this as an opportunity to make huge profits when the markets rise.
Some major global crashes are – The Great Depression of 1929, The Black Monday of 1987, the 2008 Financial Crisis, and now during the pandemic of COVID-19.
Since this blog is about the Stock Market crash in India, let’s move ahead to discussing the biggest stock market crash in India.
Biggest Stock Market Crash In India
After understanding the basic concept of the stock market crash, it is necessary to know the significant crashes in the Indian Stock Market. In this segment, we are going to list the biggest stock market crash in India.
Indian stock market crashes occur due to different reasons at different intervals of time. But among all the downfall, these three major crashes hit the market considerably.
Starting from the 2008 market crash due to the stock market turbulence in the US market, and the demonetization in 2016 to the global pandemic of COVID-19 in 2020 has impacted the stock market in its own way.
The reason is insignificant in front of its effects on the market growth, the economy of the country, and eventually the SENSEX.
So, without delay, let’s get going!
2008 Stock Market Crash India
The stock market crash of 2008 was a consequence of the significant stock market turbulence in the United States of America (USA).
Due to the ripples of this disturbance in the western nations, the stock market in India was also affected.
Let’s discuss the reasons for the biggest stock market crash after the Great Depression of 1929.
2008 Stock Market Crash India Reasons
Multiple reasons led the way towards a massive financial crisis in the USA. The consequences were severe for the western nations, but they did not end there.
The ripples were felt in many countries across the world, including India.
A few of these reasons have been listed below:
Mortgage Loans to Subprime Customers
When the bank or any organization approves a loan, the borrower signs a mortgage against that amount. This mortgage is sold off at a higher price than its value to recover the loan money if he fails to pay back the loan amount.
In the case of this stock market crash, the increasing prices of houses made it an attractive deal to provide loans against homes. Thus, banks extend loans to people with inadequate credit assets.
Even though their inability to pay the loan amount was known to these institutions, they ignored it and misguided people with the risks involved.
This ignorance led to an increase in subprime mortgage from 2.5% to 15% between 2004 – 2007.
Mild Recession in the Federal Reserve
The central bank of America, the Federal Reserve, was in a mild recession since 2001. This recession resulted in the reduction of the Federal funds rate from 6.5 in May 2000 to 1.75 in December 2001.
These reduced rates allowed the banks to lend more and at a lesser prime rate. It increased lending to subprime customers or high-risk borrowers by the banks.
Stability in the Economic Growth
The Great Modernization and stable economic growth of the country made the government officials and executives overconfident and ignored the signs of an impending crisis.
Thus, the banks continued to lend recklessly, which led to a significant crash like this.
2008 Stock Market Crash India Consequences
2008-2009 is considered as the year of the Great Recession. More than 8.7 million jobs were lost. In addition to this, many people saw a sharp decline in their retirement savings.
This decline compounded the worsening situation of housing instability and unemployment.
A Deceleration in the Economic Growth
Houses began to lose their value, and the stocks were declining. These factors contributed to an average of around $10,000 per US household. The slowing economic growth resulted in the US economy to reach $684 billion.
The Unemployment Rate Rose to 10%
Due to heavy job loss across the country, the employment rate increased to an all-time high of 10%.
Slow Down in the Housing Sector
The prices of homes were declining at a sharp rate, and the repayments of the loans were piling. Thus, in addition to losing jobs, many people lost their homes as they could not pay back the loan payments.
Biggest Automakers were on the verge of Bankruptcy
The three major automakers in the USA – Ford Motor, General Motors Company, and Chrysler LLC were on edge to go bankrupt.
Term Asset-Backed Securities Loan Facility extended a bailout to the Ford Motor Company. The rest of these companies – General Motors Company and Chrysler LLC were taken over by the Federal government.
Impact of Demonetization on Stock Market
During the year 2016, there were multiple reasons for a market crash or unprecedented downfalls.
Some of them were due to international events like Emmanuel Macron’svictory in France, US election results with Trump becoming the US President, and Brexit.
On the other hand, many internal matters also affected the stock market positions like Surgical Strikes on Pakistan, Passage of the GST Bill, and Demonetization.
The impacts were varying throughout these events, but the most impactful event was Demonetization.
Demonetization was announced on 8th November 2016 with the aim to curb black money, fake currency, and corruption. The Honorable Prime Minister told the nation about it in a late-night announcement.
The very next day, the market opened with a nose diving crash. The BSE index – Sensex opened with a fall of 1,689 points, and NIFTY, index of NSE, opened at a fall of more than 541 points.
Subsequently, Sensex slipped below the crucial mark of 26,000 to trade at 25,902.45, a 6.12% decrease. All the sectoral indices also fell up to 10.78 percent, and this trail was led by realty, automobile, and consumer durables.
Additionally, the value of the Indian Rupee also weakened by 23 paise to 66.85 against the US Dollar.
2020 Stock Market Crash
With the unforeseen pandemic of COVID – 19 taking a toll on the Global Economy, every stock exchange across the world was taken down by the repercussions. All economies were severely hit due to strict lockdowns.
But, in the Indian Stock Market case, it would be entirely wrong to label COVID as the sole reason. Multiple reasons and factors led to the 2020 crash. Let’s discuss the causes and consequences of this market crash in detail.
The first significant slump in the stock market was observed after the Union Budget 2020-21was announced on the floors of the Parliament. NIFTY fell 3%, and Sensex saw a downfall of 2%.
On 28th February, post the World Health Organization (WHO) announcement of coronavirus having a pandemic potential, Sensex lost around 1448 points, and Nifty fell by 432 points.
The major Stock Exchanges of India, both BSE and NSE, fell for the entire week and recorded the worst weekly fall since 2009.
The next steep fall of the markets was recorded after RBI took over the Yes Bank management for reconstruction.
It happened due to rising NPAs. On March 9, 2020, Sensex broke down by 1,941.67 points, while NIFTY-50 fell by 538 points.
This meltdown is credited to the uncertainty of the Yes bank crisis and the havoc created by Coronavirus across the globe.
These worse conditions in markets continued for over a week and ended with the WHO announcement of Coronavirus being pandemic. The Sensex ended with a 33-month low of 32778.14.
The global economic slowdown was also taking an extreme toll on the Indian economy. With the lockdowns in place, the trading world was filled with fears of a recession.
Further, with the increase in the number of cases in India, the markets entered a bearish slump.
Post this, the effects of COVID-induced lockdowns started showing on the economic activities and led to a gradual but steep fall of the share market. As of April, stock markets had wiped out earnings of the last three years.
Learning about the various Stock Market Crash India is essential to learn from the past and use the wisdom to diminish the losses over the years.
Since it’s next to impossible to foresee the market crash, it is necessary to be aware of the small indications left by the market.
In this article, we covered the three natural downfalls of the share market. A fall because of scams and other human-made situations is discussed very often and at length, but the most missed out aspect is this.
We discussed the ripples of the 2008 global financial crisis, the after-effects of Demonetization announced by the Government of India in November 2016, and the multiple factors leading to the 2020 recession, the first one in India.
The stock market crash in 2020 is very significant as it is the first recession-like condition in India. The biggest contributing factor to this situation is the COVID-19 economic slowdown and lockdown.
We hope you learned a lot about the insights of these three crashes.
Wish to get into Stock Market? Refer to the form below