Explained: Why Indian markets crashed and what’s likely to happen next

The Sensex reference to BSE Suddenly falls of 1,280 points or 2.2% in the first hours of trading on Monday, under pressure from lingering global inflation concerns, expectations of an acceleration in the pace of rate hikes by the US Federal Reserve and worries regarding the weakness of the Chinese economy, alongside the rise of Covid-19 cases.

While the Sensex fell as much as 2%, other key Asian markets also fell sharply on Monday. The Nikkei in Japan fell as much as 1.9%, while the Shanghai Composite in China fell as much as 1.3%.

Why did Indian markets fall?

Indian markets which opened after a four-day gap fell sharply on growing concerns over various developments, including the continuation of the Russian-Ukrainian war. There have also been concerns about the European Union embargo on Russian gas and some sanctions on Russian crude in the next round of EU sanctions.

While inflation remains a major concern, the market expects the US Fed to accelerate the pace of rate hikes; instead of a 25 basis point hike, it could even go as high as 50 basis points, experts believe.

While rate hikes were expected, a sharp rise could lead to faster outflows of funds by foreign portfolio investors and could keep emerging-economy markets and domestic stock markets under pressure.

Chinese influence

Another factor impacting market sentiment is concern over rising Covid-19 cases in China and the slower-than-expected pace of growth in the Chinese economy.

While Shanghai has been in confinement since March, the city reported three deaths Monday.

Meanwhile, the news agency AFP reported that China’s economy grew 4.8% in the first quarter as the resurgence of Covid led to a drop in economic activity. The National Bureau of Statistics also warned of “significant difficulties and challenges” ahead, reported AFP.

Experts believe restrictions in China are likely to harm global supply chains and could further lead to higher inflation, which has already been affected by the Russia-Ukraine war.

So, what future for the Indian markets?

Given the global scenario surrounding geopolitical concerns and inflation, equity markets are expected to remain volatile in the near term. REIT flows could remain volatile and could even experience an outflow in line with an expected acceleration in the pace of rate hikes by the US Fed. Even domestic inflation, which hit 6.95% in March, continues to worry Indian markets. Continued pressure from inflation may force the RBI to opt for faster rate hikes as well.

In his recent publication monetary policy statementthe RBI has signaled a change in the direction of the revival of growth to mitigate the risks posed by inflation. Although he kept key rates unchanged for now, he indicated a possible rise in repo rates in the future. “In the order of priorities, we have now put inflation ahead of growth. Now is the time to prioritize inflation over growth,” RBI Governor Shaktikanta Das had said after unveiling the bi-monthly policy review.

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