Stock markets have long been a popular method to invest money. However, it is not as simple as it appears. For some people, the prospect of investing in the stock market may be frightening; nonetheless, the more you are ready to risk, the greater the return is expected. Investing is a game of gambling where you swing between avidity and disquiet. In one minute, the markets are hitting high records, and then in the next minute, boom, it’s in the grip of a meltdown.
The month of May witnessed the most unexpected fall in stock markets which was considered a safe haven, given the stabilization of the economy and returning to normalcy. The Nasdaq dropped by more than 4.2% on 27th May, bringing its losses by more than 13%. The worst the economy had ever seen since the recession in 2008. The world, which thought that had seen its worse, had very agonizing moments. The Nasdaq index was down by 21% in 2022 worst of this year, which was a heart-throbbing pain for some.
In recent times, investors have been panicking and have become pessimistic about their investments. But what is causing their frenzy and disorientation? The simple reason is that the markets are collapsing.
The beginning of this never-ending agony is to be blamed on something the world had not anticipated seeing again. Since the devastating plague of the 1920s. Since the pandemic began, markets have been turbulent, disrupting the global economic situation. The market has consistently lost trillions of dollars since the pandemic began. Posing a significant danger to global economies. A pandemic was an unanticipated event that had rendered in abeyance the growth plans of the institutions which had predicted growth for the years beyond 2020. During the same IMF statistics dropped drastically from 3.4 percent to -4.4 percent between October 2019 and October 2020. However, the adage “there is a downhill for every uphill”, aptly reflected the market situation at the start of the pandemic.
To counteract the effect, the Indian government did all in its power, to resurrect the dormant economy. It started investing in various infrastructure projects and initiatives during the lockdown given subdued demand. Owing to reduced economic activity and lockdowns.
During the pandemic, the US Fed to resuscitate the economy had started printing new notes. When excess money was printed by the US Fed in 2020-21, it also made way to a country that has a population of 1.38 billion. Yes, you guessed it right! it’s India. India got around 37.6 billion dollars’ worth of investment by FII by April 2021. India was one of the very few countries where instead of pumping out money, FII were stacking it. As a result, the value of our currency appreciated by 3%. So much so that the RBI had amassed a massive 640 billion dollars in foreign exchange reserves. As a consequence, the Nifty had more than quadrupled from March 2020 (7800) to October 2021(18500). The emergency fiscal measure adopted by the government for economic resuscitation was successful and revitalized the markets once again.
Now that everything was going back to its original pace in January 2022, the US Fed had abruptly ceased printing cash. And certainly, as the economy improves, the necessity for printing money diminishes as more employment opportunities are created and boosting demand for products and services, increasing the circulation of money in the economy. But, little do you know it is not something that time will fix. With the changes in US Fed policies interest rates had risen in US. The US bonds became attractive as the yields were now increased. As soon as this new opportunity was created the FII withdrew from the Indian Stock market. With a risk-free investment available, why would anyone desire to invest in a riskier asset for the returns?
The shares of FII ownership in March 2022 has reached the pre-pandemic level which signals correction in the existing BSE/NSE benchmarks. Therefore, as the FII have constantly been selling their shares since January 2022, which has now accumulated to around 14.55 billion dollars resulting in a 3-year low for NSE 500 companies on 23rd April 2022. In contrast to 640 billion dollars that were pumped into Indian stock markets only 14.5 billion have been withdrawn. As the FII started to withdraw it had a negative impact on the Rupees value (in comparison to the US dollar). The RBI could simply sell part of the forex reserves it had received to arrest the decrease. However, the RBI does not intervene, and it allows the market forces to determine the USD-INR exchange rate. This may lead to another nerve-wracking stress of inflation as now the rupee value depreciates.
To achieve stabilization, RBI had to raise the repo rate by 0.4 percent and the CRR by 0.5 percent in May 2022, reducing the money supply and aiming for stabilization of the Rupee. Due to inflation, the price of our essential goods, particularly oil, food, etc. will rise, causing households to tighten their spending limits. To address this impending problem, RBI has begun selling forex reserves and started purchasing Indian rupees, therefore balancing the demand and supply situation. Considering the inflation to be high right now, investors are now withdrawing capital from Indian stock markets due to money crunching issues and are sparing no one in their way. No one would want to hold a stock that is bound to fall, this will eventually result in selling of more shares and entering a bearish market. Even our worst foes would also not wish this situation to befall us.
This is just one side of the story that had kept us in the dark. The story continues by moving on to the next part, which is the Ukraine-Russia war. It is the part where the hardships have just begun. After months of fighting, the stock market was down by more than 7%. A 7% may not seem substantial in % terms. However, given the expanse of the Indian stock market, it is a monetary loss of INR 13 lakh crores, that is how much the stock market had lost just barely an hour after Russia had declared war. Ukraine and Russia account for more than a quarter of the worldwide wheat market. Ukraine was forced to close its grain terminals on the Black Sea, causing wheat shortages around the world. The war has resulted in new western sanctions being imposed. This in turn, has increased the prices of crude oils and metals. It has made oil so expensive that the stocks of the automobile and manufacturing market are in ruins and have been tapering them of industry profits. Rising fuel prices have impacted every industry, and stock market sentiment has dropped sharply. The price of petrol and diesel have increased by 19 paise per litre between January – April 2022. Despite the fact that it is a conflict between two nations that are not even tied to our borders, its impact has startled everyone since February 2022. The saga still continues to date, with no one spared in this bloodbath.
The impact of the turbulence is also felt in Europe, the UK, and the Majority of the western economies. It has gotten to the point where the Bank of England on 5th May 2022, had discussions and warned of a recession. That may be approaching us faster than the speed of light and may hit us without even batting an eye. This has made the global market tremble in fear and is in shackles right now. The are many reasons contributing to the fall in the stock market, some of them have been discussed above.
The stock market does not operate at peak efficiency throughout the year. All we can hope for is a peaceful outcome that benefits and restores everyone’s faith in the Stock market. Investors should focus on quality stocks of companies that have strong fundamentals and keep monitoring their portfolios because “where the mountain ends the peak starts” and you may never know if a miracle might just happen.
By Nitya Agrawal