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4 reasons for market volatility in India
For a long time, the Indian financial markets were performing exceedingly well. And then all of a sudden, the Dow Jones plunged by more than 1,500 points in a single day. This was the biggest-ever point drop for the index in a single day. Subsequently, London’s FTSE 100, Japan’s Nikkei and even Indian markets witnessed downfalls.
Here are the reasons why the Indian stock market has been experiencing major volatility.
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US ripple effect:
The US is the biggest economy in the world. And the US dollar is considered to be the currency of reference for all countries. As a result, big market movements in the US markets invariably have a ripple effect all over the world. When the Dow Jones fell, the impact was felt, in varying degrees, across all major economies, including India.
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Rise in crude oil prices:
Brent crude oil spot price rose to $64.2 (3.5%) per barrel last week. This has been the highest increase since June 2015. The price rise resulted in a major sell-off in equities and bonds. The Sensex fell by 360 points or 1.1% as a result of this impact. This was the biggest drop for the index in six weeks.
India is heavily dependent on oil imports for its energy requirements. As a result, a huge rise in oil prices negatively impacts the country. -
Risk of fiscal slippage:
The government has outlined a fiscal deficit target of 3.3% of GDP for 2018-19 against a revised estimate of 3.5% of GDP for 2017-18. And while the fiscal deficit is according to expectations, many experts are of the opinion that there could be risks of slippage if economic activities do not formalise rapidly in the year.
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Market correction:
The market has been performing exceedingly well for a long time. Over the past year, both the market indices Sensex and Nifty broke new records. Many experts were of the opinion that a market correction was imminent. Share valuations were considered extremely pricey. The Sensex traded at a trailing P/E of 25.07 times. In comparison, the average P/E for the past five years was 19.81, according to media reports.
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Budget proposals:
During the budget, the long-term capital gains (LTCG) tax was proposed for equities too. This new tax comes into effect on 1 April 2018. The stock market took an immediate beating following the announcement. The Sensex fell by more than 2,000 points post the proposal. The budget announcement, along with global sell-offs, were the main reasons for this large-scale rout.
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9.6 lakh crore
This is the amount (in rupees) that investors in India lost in just three days. Post the announcement of the LTCG tax and the global uncertainty, Indian investors witnessed a major erosion of wealth in the stock markets.
