The world of finance has experienced its fair share of turbulent storms, and Indian markets are no different. Stock market crashes, though painful, are crucial events in the financial history of any nation.
They help us see how the financial system can be at risk, what can happen if people speculate too much without control, and why rules to manage it all are very important.
In this blog, we will visit the history of India’s stock market crashes, analyzing their causes, impacts, and the lessons they’ve taught us.
What is a Stock Market Crash?
A stock market crash occurs when there is a significant and sudden decline in stock prices, disrupting the normal functioning of financial markets. This often leads to panic selling and widespread losses for investors. These catastrophic events can be triggered by various factors, such as economic downturns, financial fraud, speculative bubbles, or external shocks.
Why Do Stock Market Crashes Happen?
Stock market crashes are complex phenomena with multiple causes. Understanding the root causes of these crashes is essential to prevent their recurrence. Here are certain reasons why stock market crashes happen.
Flash crashes
These are sudden and intense drops in stock prices that occur within an exceptionally brief timeframe, often just a matter of minutes or hours. These abrupt plunges are frequently triggered by technical malfunctions, such as erratic behavior in automated trading algorithms.
Bear markets
These are extended periods during which stock prices experience a decline exceeding 20%. Bear markets can result from a range of factors, including economic recessions, geopolitical upheavals, and shifts in investor sentiment.
Black swans
These refer to unforeseen and erratic events that wield a significant impact on the stock market. Instances of black swans encompass the 9/11 terrorist attacks and the COVID-19 pandemic, both of which had unforeseeable repercussions on financial markets.
Sector-specific downturns
These crashes affect particular sectors within the economy, such as the technology or financial sectors. Sector-specific crashes can be the result of factors unique to that sector, such as a speculative technology bubble or a financial sector crisis.
Country-specific downturns
These downturns are restricted to a specific country’s stock market. Country-specific crashes can be triggered by a myriad of factors, ranging from political instability to economic mismanagement within that nation.
History of Stock Market Crashes in India
India has a long history of stock market crashes, with some events still resonating in the collective memory of investors. Understanding these crashes can provide valuable insights into the challenges and opportunities of investing in India.
Harshad Mehta Scam (1992)
The Harshad Mehta scam, also known as the securities scam of 1992, was a massive financial scandal that rocked India to its core. Stockbroker Harshad Mehta manipulated the stock market by exploiting loopholes in the banking system, leading to a surge in stock prices.
The scam was exposed in April 1992, leading to a massive sell-off in the stock market and the collapse of several banks and financial institutions.
Mehta used a variety of methods to carry out his scam. One of his most common methods was to use ready forward contracts, which are agreements to buy or sell securities at a predetermined price on a future date. Mehta would typically borrow money from banks to buy securities using ready forward contracts. He would then sell the securities at a higher price, pocketing the difference.
Mehta also used other methods to manipulate the stock market, such as:
- Creating fake bank receipts
Mehta would create fake bank receipts to show that he had the funds to purchase securities. This allowed him to borrow more money from banks.
- Bribing brokers
Mehta would bribe brokers to place orders for his securities at inflated prices.
- Using multiple accounts
Mehta used multiple accounts to trade securities, which allowed him to control the supply and demand of certain stocks.
Mehta’s scam had a devastating impact on the Indian economy. The BSE Sensex, which had reached heights during the scam, crashed from around 4,600 points to below 2,000 points within a few months. The scam also led to a loss of confidence in the Indian stock market and financial system.
Mehta was eventually arrested and convicted of fraud.The Harshad Mehta scam is a cautionary tale about the dangers of greed and corruption. It is also a reminder of the importance of strong financial regulations.
Read more about Stock Market Scams in India
Dot-com bubble (2000)
The 2001 dot-com bubble crash was a major event that had a significant impact on the global economy, including the Indian markets. The bubble was caused by a combination of factors, including excessive speculation in technology stocks, unrealistic valuations, and a lack of government regulation.
The bubble began to burst in early 2000, and by the end of 2001, the Nasdaq Composite Index had lost over 75% of its value. The crash had a ripple effect throughout the global economy, as investors lost confidence in technology stocks and other risky assets.
The Indian markets were also hit hard by the dot-com bubble crash. The BSE Sensex Index fell by over 50% between 2000 and 2002. The crash had a particularly negative impact on the Indian technology sector, as many technology companies went bankrupt or were forced to merge with other companies.
Global Financial Crisis (2008)
The global financial crisis of 2008 was the worst financial crisis since the Great Depression. It was caused by a combination of factors, including the subprime mortgage crisis, the collapse of major financial institutions, and a global economic slowdown.
The crisis had a significant impact on stock markets worldwide, including India. India’s stock markets experienced a sharp decline during this period, with the BSE Sensex dropping from over 20,000 points in January 2008 to below 9,000 points in October 2008. This crash was primarily driven by concerns about the global banking and financial sector’s stability.
European Debt Crisis (2011)
The European debt crisis that started near the end of 2010 had a big impact on India’s stock market. People were worried about how the crisis would affect not only India but also the whole world’s economy which led to this selloff.
The growth of India’s economy, which had been strong at 8.5% in 2010-11, slowed down to 6.7% in 2011-12. When the economy slows down, companies don’t make as much money, and people don’t want to buy as many stocks.
In 2011, the BSE Sensex dropped more than 25%. This was the worst it had done since the global financial crisis in 2008. And it wasn’t just the stock market; the amount of money from other countries coming into India’s stock market fell from $29 billion in 2010 just a little over $1 billion in 2011.
Demonetization (2016)
In November 2016, the Indian government announced the demonetization of high-denomination currency notes, the 500 and 1,000 rupee notes. This was a sudden and unexpected move, and it led to a temporary cash crunch in the Indian economy.
Right after the government’s announcement, the BSE Sensex dropped by more than 6%. People were trading fewer stocks on the market because they were worried about the money situation. Some parts of the economy were hit harder than others by this change, especially Real estate, Banks, NBFCs and FMCG companies.
COVID-19 Pandemic (2020)
The COVID-19 pandemic, which began in late 2019, had a severe impact on global stock markets, including India. In March 2020, Indian stock markets experienced a sharp and rapid decline, with the BSE Sensex falling from around 41,000 points to below 26,000 points in a matter of weeks. The crash was driven by fears of the economic impact of the pandemic and global uncertainty.
Lessons Learned from Stock Market Crashes
Stock market crashes have taught us valuable lessons about the importance of vigilance, regulation, and investor education in maintaining the integrity of financial markets. Investors can take steps to protect themselves from future crashes, while regulators and policymakers can implement measures to prevent these events from happening.
Conclusion
Stock market crashes, though unsettling, serve as pivotal chapters in India’s economic history. By understanding the past, we can secure the future of India’s stock markets, navigating the stormy seas of uncertainty and emerging stronger and more resilient than ever before
