5 Key Factors Behind the 1,000-Point Drop in Sensex

On September 30, the Indian stock market experienced a notable downturn, with key indices, the Sensex and Nifty, declining over 1%. Investors continued to engage in profit-taking at record-high valuations, amplifying losses from the previous trading session.

The Sensex fell sharply by over 1,000 points, while Nifty slipped below its critical threshold of 26,000. By midday, the Sensex had plummeted 971 points or 1.1% to reach 84,600, and the Nifty dropped 280 points to 25,898. Market breadth reflected the overall negative sentiment, with 1,424 stocks advancing, 2,028 declining, and 122 remaining unchanged.

This broad-based selloff affected not just large-cap stocks, but mid-cap and small-cap stocks also saw substantial pressure. In addition, the India VIX, which measures market volatility, surged by 7%, indicating increased anxiety among investors.

Market analysts identified five primary factors behind this sharp fall in the Indian indices.

1. Geopolitical Tensions in the Middle East:

Increased conflict in the Middle East has been a significant contributor to the market’s decline. Recent escalations, including intensified Israeli strikes on Iranian-backed forces, have unnerved global investors. Tensions flared after Israel killed Hezbollah leader Sayyed Hassan Nasrallah in Beirut, sparking retaliatory attacks on Hezbollah in Lebanon and Houthi forces in Yemen. Though tensions in the region have long been a factor for global markets, this recent spike has driven investors away from riskier assets like equities and toward safer investments such as gold.

“This sharp market decline, particularly in Nifty and Sensex, can largely be attributed to the geopolitical turmoil arising from heightened Israeli military actions in Lebanon. The resulting uncertainty has cast a shadow over global markets,” explained Shrey Jain, Founder and CEO of SAS Online.

2. China’s Economic Stimulus:

According to V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the outperformance of Chinese stocks is another significant factor influencing foreign portfolio investments. The Hang Seng index saw a remarkable 18% surge in September, driven by hopes of economic recovery following monetary and fiscal stimulus measures by Chinese authorities.

“The recent rally in Chinese stocks is largely due to optimism around the government’s stimulus efforts. The low valuations of Chinese shares are keeping the momentum going, and this could continue to attract foreign investors. As a result, we may see continued selling by Foreign Institutional Investors (FIIs) in India as they shift their funds to more promising markets,” Vijayakumar said.

Despite this, he noted that the impact of FII selling on the Indian market is likely to be minimal, as strong domestic liquidity is capable of absorbing the outflows.

3. Profit Booking:

Before the current decline, Nifty and Sensex had enjoyed a six-session rally, gaining over 3% on the back of a larger-than-expected interest rate cut in the U.S., which raised expectations of foreign inflows. However, with no new major triggers on the horizon, investors began booking profits.

“After a series of gains, Nifty appears to have entered a consolidation phase,” said Deepak Jasani, Head of Retail Research at HDFC Securities. “The index may face resistance in the 26,250-26,475 range, while it could find support near the 25,849 level in the short term.”

4. Mixed Global Market Cues:

Global markets have also presented mixed signals, adding to the uncertainty. Chinese markets rose by 4% following the release of September’s PMI, which came in at 49.8, slightly beating expectations but still reflecting the fifth consecutive month of contraction in the manufacturing sector. In contrast, Japan’s Nikkei 225 dropped by over 5% as investors reacted to Shigeru Ishiba’s victory in the ruling Liberal Democratic Party leadership race, setting the stage for him to become Japan’s next prime minister.

Meanwhile, the U.S. markets provided mixed outcomes. The Dow Jones Industrial Average closed at a record high on September 27 due to hopes of further Federal Reserve rate cuts after a benign inflation report, while the Nasdaq and S&P 500 showed minor declines.

5. Anticipation Ahead of U.S. Data and Powell’s Speech:

Investors are also exercising caution ahead of key events in the U.S., including Federal Reserve Chair Jerome Powell’s speech, which could provide clues about future monetary policy. Additionally, important data releases, such as job openings, private sector hiring figures, and the ISM manufacturing index, are expected this week. The week will conclude with the U.S. nonfarm payroll and unemployment reports, which could have implications for future interest rate decisions.

Given these global developments, the outlook for Indian equities remains cautious in the short term, as investors navigate a complex mix of geopolitical, economic, and market-specific risks.

Disclaimer: The views expressed by the experts are their own and do not necessarily reflect those of this platform. Investors are encouraged to seek advice from certified professionals before making any financial decisions.