With every passing decade, the Indian stock market has undergone several major downturns, which have usually found unique causes and periods of subsequent recovery. Events of this sort have to be understood to obtain the insights that the market provides into itself and the investors.
India’s Major Stock Market Crashes:
1. The Harshad Mehta Scam and the 1992 Crash
The Indian stock market was on a downward spiral from the year 1992 owing primarily to the infamous Harshad Mehta scam. Mehta, a stock broker, manipulated the market by exploiting bank loopholes which created an artificial rise in stock prices. Once the scam was uncovered, the market crashed, and the BSE Sensex fell down by 12.77% on April 28, 1992. The crash wiped out the investor wealth and further led to regulatory changes in the Indian financial system.
2. The Dot-Com Bubble Burst in 2000
The phenomenon of bursting of the dot-com bubble was a worldwide affair-the Indian stock markets suffered the same fate as the rest of the globe. The deployment of excessive speculation in technology stocks was reflected in the unreasonably high valuations of these stocks. When the bubble burst, the stocks crashed, and this caused a ripple effect in the market. Hence, the BSE Sensex had witnessed cumulative amounts of falls, and several years passed before the market could really recover those highs.
3. The Global Financial Crisis of 2008
The 2008 worldwide financial crisis commenced with the fall of Lehman Brothers on U.S. soil and severely crippled many economies globally, with India being no exception. On January 21, 2008, one of those days marking the saddest erosion of investor wealth, the BSE Sensex plunged 1,408 points to 17,605. The crisis was characterized by a liquidity crunch and aggravation of the economic activities. The Indian market started its recovery, thanks to policy and regulatory interventions, followed by a quick spurt beyond pre-crisis levels a few years after the crisis.
4. The COVID-19 Pandemic Crash in 2020
In the starting of the year 2020, the COVID-19 pandemic laid a disorder rid under its feet-the entire world economy. March saw a steep decline in the Indian stock markets. The BSE Sensex fell by 13985 points in just a week’s time thereby wiping out a figure of ₹13.95 lakh crore of invested wealth. Uncertainty around the pandemic, nationwide lockdowns, and hampering of economic activities caused this decline. Even if this long climb is so arduous and time-taking, the market showed itself quite resilient, and with the gradual reopening of the economy and the carrying out of vaccine rollouts, it accelerated back to new peaks by the end of the year 2020.
5. The 2024 Post-Election Crash
The Indian stock market, following the general elections, is devastated in June 2024. The Nifty index dropped from 23,263.90 on June 3 to 21,884.50 on June 4, which represents a fall of approximately 5.93%. The principal reason behind the deep fall in Nifty is the shocking election results, where the BJP managed to win around 200 seats, whereas all exit polls suggested before the elections that it would win more than 400 seats.
The political instability evaporated the investor confidence and led to a record market crash in four years. The Nifty did rebound into 24,141.95 by July 1, 2024, proving that the market does come back from political shocks.
6. The Late 2024 to Early 2025 Downturn
The Indian stock market was in a long-drawn bearish phase between September 2024 and January 2025. The BSE Sensex fell from an all-time high of 85,978.84 in September 2024 to approximately 76,000 by mid-January 2025, representing a decline of almost 11.79%. Small- and mid-cap stocks were most badly affected, with declines of around 21% and 19%, respectively.
This decline was mainly due to massive exits made by foreign portfolio investors, most of whom redirected their investments to other markets after massive technological advancements elsewhere. Other local causes include reduced government spends, abnormal monsoon patterns, and rising inflation. Despite all these, the Indian market has always shown resilience in recovery, and similar recoveries are expected under economic stabilization.
Lessons from Past Crashes
1. Market Resilience: The Indian stock market has shown the ability to recover periodically from downturns and attain newer heights.
2. Diversification: Portfolio diversification for the investor may help in absorbing shocks during market downturn.
3. Long-Term Outlook: A long-term planning horizon draws its supports from the ability of the investor to ignore or ride out short-term fluctuations.
4. Regulatory Reforms: After each crash, there comes a metamorphosis of a suit of regulatory improvements, which touches on issues of market transparency and investor protection.
Frequently Asked Questions (FAQs)
Q1: What generally brings about stock market crashes in India?
A1: Stock market crashes in India can be caused by a multitude of reasons such as sluggish economic growth, political instability, global financial crisis, corporate scams, and certain unanticipated events like a pandemic. These factors sometimes create an atmosphere of panic selling resulting in a sudden dip in stock prices.
Q2: In general, how much time does the Indian stock market take to recover from a crash?
A2: However, this time frame can vary from crash to crash based on their severity and their underlying causes. For instance, following the global financial crisis in 2008, it took a few years for the Indian market to come back to its prior highs. Conversely, the recovery from the crash caused by the COVID-19 pandemic was quick, with the markets hitting new highs before the end of the same year.
Q3: What strategies can investors employ during a market crash?
A3: During a market crash, investors might consider:
- Staying Calm: Avoid making impulsive decisions based on fear.
- Reviewing Portfolios: Assess and realign investments based on long-term goals.
- Diversifying Investments: Spread investments across various asset classes to mitigate risks.
- Seeking Professional Advice: Consult financial advisors for personalized strategies.
Q4: Are market crashes a good time to invest?
A4: Market crashes can present opportunities to purchase quality stocks at discounted prices. However, it’s essential to conduct thorough research, assess risk tolerance, and have a long-term investment perspective before making such decisions.
Q5: How have regulatory bodies in India responded to past market crashes?
A5: Regulatory bodies like the Securities and Exchange Board of India (SEBI) have implemented various measures post-crashes, including tightening disclosure norms, enhancing surveillance mechanisms, and introducing reforms to improve market transparency and protect investor interests.
Understanding the history of stock market crashes in India and their subsequent recoveries offers valuable lessons for investors. While market downturns can be challenging, they also underscore the importance of resilience, informed decision-making, and a long-term investment approach.
