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Wednesday, September 23, 2020

Explained: Why the Sensex crashed 1,382 points on Monday

From September 1 onward, investors will only be allowed to trade in the market with the 20 per cent margin money, and Sebi had mandated that all open positions should be squared up on August 31.

Written by Sandeep Singh , Edited by Explained Desk | New Delhi | Updated: September 1, 2020 8:13:18 am
The index fell sharply by 1,382 points from the day's high to close at 38,628. File/Express Photo by Pradip Das

The benchmark Sensex at BSE fell sharply by 839 points or 2.13 per cent on Monday to trade at 38,628 following a fresh flare-up in the ongoing tensions between India and China at the border area in Ladakh’s Pangong.

While the fall came as the country waited for GDP growth data for the crucial April-June quarter that was set to be released later in the day, experts feel that the border tension led investors to book profits, as there were growing concerns about overvaluation in the markets. As per data released by the government after the markets had closed for the day, India recorded a negative growth of 23.9 per cent in Q1 of 2020-21, the first contraction of the GDP in more than 40 years.

How much did the Sensex fall?

The Sensex opened on a positive note, and breached the 40,000 mark for the first time in six months after gaining 547 points in the morning trading hours. But the index then fell sharply by 1,382 points from the day’s high to close at 38,628.

This is the biggest fall in absolute and percentage terms since May 18, 2020, when the Sensex fell 1,068 points or 3.4 per cent.

But why did the Sensex fall?

While the markets have been trading in expensive territory for some time now, and concerns have been raised even by the RBI Governor, the fall on Monday was triggered by the fresh tension on the India-China border.

As news of the “provocative military movements” by the Chinese PLA “to change the status quo” came, investors rushed to book profits, leading to a sharp fall in benchmark indices.

Anticipation of the quantum of contraction in the GDP for the quarter ended June 2020 was also a factor. Experts say that since the government was set to release the data later in the day, it was likely that investors were gearing up to take fresh positions.

Another factor that market participants say could have added to the quantum of fall is the regulatory requirement of squaring up of all open positions for clients by brokers on August 31, 2020.

From September 1 onward, investors will only be allowed to trade in the market with the 20 per cent margin money, and Sebi had mandated that all open positions should be squared up on August 31.

“This is a big reason too and could have added to the correction. However, markets have been in the overvalued zone for some time now, and have been waiting for some reason to correct. I believe the China factor came as a reason for the correction,” said CJ George, MD, Geojit Financial Services.

The sharp fall in Indian markets was more isolated in nature. While the Nikkei in Japan had closed with a gain of 1.1 per cent, the premier indices in Germany and France were up by 0.5 and 0.7 per cent respectively in afternoon trading hours. Hang Seng in Hong Kong was down 1 per cent and FTSE in UK was down 0.6 per cent.

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The tension in Ladakh aside, was this fall expected?

Concerns about expensive valuations have been coming from various corners over the last few days.

On August 21, the RBI Governor warned that there is a clear disconnect between the sharp surge in stock markets and the state of the real economy, as surplus global liquidity is driving up asset prices across the world.

He forecast that there will “definitely be a correction” in stock markets and the central bank is prepared to take all steps that are required to maintain financial stability.

Another concern was over the GDP growth data for the June quarter. Since the country witnessed a stringent lockdown and witnessed a sharp decline in economic activity, many were expecting the GDP to witness a large contraction.

Before the data came in, GDP contraction for the first quarter were being pegged at an average 20 per cent by economists, with the de-growth range between 15.2 per cent and 25.5 per cent. As it turned out, the data stopped at the farthest end of that range.

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