Why did the Sensex plunge by 1189 points on Monday 20-December? What were the factors that triggered this massive fall in the stock markets?

On the 20-December, the Nifty plunged by 371 points and the Sensex fell sharply by 1,190 points. However, the correction actually began on 14th October and has been going on for over 2 months now. Nifty peaked on 18-October at a level of 18,477 levels. As on 20-December the Nifty closed at 16,614. That is a full 10.1% fall from the peak. Normally, a correction of 10% from a peak is understandable, but we need to wait and see

However, let me come back to the question on why the markets have fallen so sharply and why the fall has got sharper in the recent past. The fall has come with a lot of volatility. The first reason is of course the Omicron virus. It is not yet an alarming situation in India but countries like UK, Germany, Austria and Netherlands are moving to total lockdowns around Christmas. Any disruption in other markets will hit travel and trade for India.

We cannot ignore the big role that the recent Fed statement has played in the market carnage in India. It has been all about Fed hawkishness. In its policy statement on 15th December, the Federal Reserve committed to literally double the taper and complete the liquidity clampdown as early as March 2022. But above all, the concern was also that rate hikes in the US may not wait too long and may start soon after the taper in Mar-22.

Markets have a more fundamental problem dealing with inflation which is showing no respite in India and in other countries. The retail inflation is as high as 6.8% in November in the US. In India, retail inflation would have been much higher than 4.91% had it not been for the high base effect. The real concern is the WPI inflation at 14.23%, as it is now evident that the supply chain constraints are posing the biggest problem for Indian inflation.

While Evergrande is a peripheral problem which could snowball any moment, steep valuations are also a concern in India. In December, India has seen heavy selling by FPIs while other Asian EMs like Taiwan, South Korea and Thailand are getting consistent inflows. It is, therefore, not just a risk-off story but also a valuation story that is working against India. It is hard to say when this will bottom, but Q3 results could be a big trigger.