InvestorQ : What was the reason for such a sharp fall in the markets, considering that Sensex fell by 770 points in a single day?
Chandralekha Desai made post

What was the reason for such a sharp fall in the markets, considering that Sensex fell by 770 points in a single day?

Mitali Bhutta answered.
3 years ago

There were quite a few factors that went against the market and in fact, they all combined in a single day to put pressure on the markets. Here are 7 broad factors that took the markets so sharply down on Tuesday.

a) The GDP growth number was a major reason for the pessimism in the markets. At 5% for the June quarter, the GDP was much lower than China and that has not gone down well with the markets. Investors were worried that the growth premium that Indian markets commanded may not really last.

b) It was not just the GDP growth but other numbers also came in very weak. For example, the core sector growth came in at just 2.1% and the PMI Manufacturing came at a 15-month low of 51.2. All these factors contributed in putting pressure on the key sectors and the indices overall.

c) Auto sector was a key reason for the weakness on Tuesday. The August numbers for auto sales and production was quite discouraging. Maruti saw numbers fall by 33% and Tata Motors by 58%. This is the seventh month in succession that auto numbers have shown deep negative growth.

d) PSU banks took a big hit on the back of the announcement of the mega merger of banks which reduced the number of PSBs from 10 to 4. Markets were quite sceptical as they expected that combining two weak banks would create a weaker bank and markets may view this decision negatively.

e) OMCs were also disappointed by the government decision to sell its entire stake in BPCL to IOCL. Oil companies are already under pressure and they are being constrained to impact their financials negatively without any major business advantage. That was one reason why the oil sector overall sold off.

f) Rupee was a key reason with the INR weakening closer to the 72.35/$ mark on the back of strong dollar and expectations of weak risk-off flows from foreign portfolio investors. The rupee fall normally leads to bunched FPI selling in the markets too.

g) Finally, the tardy progress on the trade talks has had the markets disappointed. On September 01th, the US imposed additional 5% tariffs on Chinese imports and China has also retaliated. This has thrown out any chances of rapprochement.

In fact, too many expectations were built around the reforms process and the bank mergers and Monday was, in a way, a return to reality.