Why Sensex fell by more than 1,700 points today
2 min read 12 Apr 2021, 05:12 PM ISTIf the covid pandemic continues to spread, businesses are bound to be negatively impacted and job losses will mount
PremiumStock prices took a tumble on Tuesday with the BSE Sensex, the most famous stock market index in India, falling by 3.4% or 1,708 points to close at 47,883 points. After this fall, the Sensex is down by 8.2% from its mid-February peak.
The reasons for the fall were local. Let’s look at them point-wise.
1) The Maharashtra government is contemplating a complete lockdown in order to control covid-19 raging across the state. When it comes to manufacturing, Maharashtra comes right at the top, contributing around 17% of India's total manufacturing in 2018-19.
Let’s take the example of the auto and the auto-ancillary industry, a lot of which is based in and around Pune. The city's India's worst-hit by covid-19, recording 12,590 new cases on Monday. If there is a lockdown, the production of these industries is bound to be impacted, regardless of whether the government allows them to continue working or not.
There will be second-order effects as well. Everything that goes into the making of an automobile, from steel to rubber to plastic, will be negatively impacted. Of course, it’s not exactly possible to measure this impact. Nevertheless, there will be an impact. And the stock market does not wait for things to happen; it discounts for possibilities and that’s what happened today.
2) Some of the biggest Indian cities are getting the highest number of covid cases, be it Mumbai, Delhi, Pune or Bengaluru, for that matter. This will impact consumption expenditure in the days ahead, with weekend lockdowns and night curfews already being implemented in a few places. As the pandemic spreads further, people will prefer to stay at home. Once that happens, money will be spent only on the most basic things.
If the covid pandemic continues to spread, businesses are bound to be negatively impacted and job losses will mount. The fear of something like this happening is already going around. This will negatively impact the economy, a fear which pulled down stock prices.
3) While state governments across the country have been advising social distancing, election rallies and religious congregations are under way. Tuesday was the second Shahi Snan, part of the ongoing Mahakumbh in Haridwar. The third Shahi Snan and the fourth Shahi Snan are scheduled for 14 and 27 April. People from different parts of the country congregate in Haridwar for this occasion. It will be interesting to see where covid numbers go, after this. They are likely to go up, though establishing a one-to-one correspondence will be difficult.
4) With the Reserve Bank of India (RBI) announcing a massive money printing programme of ₹1 trillion, the rupee continues to lose value against the dollar. One dollar was worth ₹74.55 as on 9 April. As I write this on Monday evening, one dollar is worth ₹75.06. A movement of 50 paisa during one day in the foreign exchange markets is a rarity.
A depreciating rupee hurts foreign investors because their returns in dollar terms go down. This could also be a reason for foreign investors selling out, in order to avoid foreign exchange losses.
The way the stock market goes in the days to come, will depend on India’s covid numbers as well as the way foreign investors feel about it. Around this time last year, they had started to ignore India’s covid numbers and invested a massive amount of money in buying Indian stocks. This was fuelled by all the money printing being carried out in the Western world.
Vivek Kaul is the author of Bad Money.
