After the crash of both Sensex and Nifty on 28th February, there is panic among small investors, because Sensex has been declining for the last 5 months, and Nifty has also been declining continuously for a few days after 1996 i.e. after 29 years. This has created a fear in the minds of investors that their money is not safe in the stock market and the selling spree is continuing.
A total of 30 companies are listed in the Bombay Stock Exchange (BSE) index Sensex and 50 companies are listed in NSE or Nifty. In the stock market, Indian, foreign institutional investors, individual foreign investors etc. invest in listed companies. Both the indices are very sensitive. When the shares of a particular company among the listed companies are continuously sold, then the investors’ trust in that company decreases and the price of the shares of that company decreases, due to which the investors have to suffer losses. For example, if someone has bought 1 share of X company for Rs 100 and when the price of that share falls to Rs 80, then the said investor suffers a loss of Rs 20.
There are many reasons for the fluctuations in the price of shares. For example, poor financial performance of the company or the company getting involved in some controversy, political instability, government policies, weakening of rupee against the dollar, global uncertainty, fear of trade war, geopolitical crisis, policies adopted by the US central bank Federal Reserve, etc.
SEBI is the regulator of the stock market, but despite the presence of SEBI, some cases of artificially bringing down the price and then raising it have been seen. This is done to benefit a few special people, in which the biggest loss is suffered by small investors. Harshad Mehta scandal can be mentioned in this case. There is a need to be alert and understand the market to detect the disturbances in the market. Potential losses can be avoided by keeping a constant eye on the movement of the stock market. It is important that one should not try to make investment in the stock market a means of livelihood and avoid excessive greed.
Foreign institutional investors have invested a large amount in the Indian stock market, in which the US is in the first place, while Luxembourg and Canada are in the second and third place. On February 28, foreign institutional investors sold shares worth Rs 11,639 crore, while this year foreign institutional investors have sold shares worth more than Rs 1 lakh crore. On the other hand, domestic investors sold shares worth about Rs 8 lakh 88 thousand crore on February 28, the 6 biggest reasons for which are, the announcement by US President Mr. Donald Trump to impose 25 percent tariff on Canada and Mexico and 10 percent additional tax on Chinese goods, which may lead to a global trade war, weakness in the stock markets of Asian countries such as Hong Kong, China and Japan, the current stance of the Federal Reserve Bank of US, decline in quarterly profits of some listed companies due to decrease in economic activities, the persistence of geopolitical crisis, the rupee being continuously weak against the dollar, etc. Apart from these, overvaluation of shares and psychological reasons are also important factors for the stock market crash. There is a tradition in India to follow the crowd. After seeing some people selling, others also started imitating them. It seems so because on February 28, selling was recorded in shares of all sectors like IT, telecom, health, banking, FMCG etc. Therefore, there does not seem to be any scope for tampering with the market.
Gross Domestic Product (GDP) has increased to 6.2 percent in the third quarter of FY 2024-25 from 5.6 percent (revised estimate) in the second quarter. In addition, the GDP growth rate forecast for FY 2024-25 has been raised from 6.4 percent to 6.5 percent. These figures show that the pace of growth is accelerating.
Due to reduction in prices of food items, the retail inflation rate based on Consumer Price Index (CPI) came down to 4.31 percent in January, which is the lowest in the last 5 months. It was at 5.22 percent in December, while it was at 5.1 percent in January 2024. Earlier in the month of November, the inflation rate was at 5.48 percent.
To boost economic activities, the Reserve Bank of India reduced the repo rate by 0.25 percent in the monetary policy review conducted on February 7, bringing it down from 6.50 percent to 6.25 percent. It is worth noting that the repo rate has been reduced after about 5 years. The central bank was avoiding reducing the repo rate till now mainly due to inflation.
After loan growth between 14 percent and 16 percent in the last two years, overall credit growth has been slowing down for the last few months and in December 2024 it has come down to 11.2 percent. A major reason for this is the high lending rate. Right now, banks do not have cheap capital. Therefore, they are forced to lend at expensive rates and due to the availability of loans at expensive rates, common people and businessmen are avoiding taking loans. Because of this, companies are short of capital, due to which they are not able to produce at full capacity.
By cutting the repo rate by 0.25 percent by the Reserve Bank of India, banks will get capital at a cheaper rate and they will be able to lend at a cheaper rate and when loans are available at a cheaper rate, both common people and businessmen will take loans, which will accelerate both investment and savings and consumption will increase as well as economic activities will also increase.
In the budget, the government has clearly stated that its aim is to accelerate development. With the GDP growth rate being 6.2 percent in the December quarter, the hope of accelerating the pace of development has increased. Also, to further increase the growth rate, the Reserve Bank of India has cut the repo rate. Due to the reduction in inflation in the month of January, the way has been cleared for cutting the repo rate in the upcoming monetary reviews, which will boost the pace of development of the country and when the economy becomes strong, there will be less scope for selling in the stock market and it will be possible for investors to get attractive returns on their investments. Therefore, there is no need for investors to panic, instead they need to avoid unnecessary selling.
Satish Singh, Ahmedabad Based Senior Columnist, views are personal.
