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What Led to the Biggest Fall in the Sensex in 5 Years?


Over exuberance can sometimes come with a price and that is exactly what happened on Tuesday when the Sensex saw a 854 points decline. Since the last few months that the Narendra Modi government has taken charge at the centre, markets have gone ballistic.


Even penny stocks, which lack fundamentals have rallied manifold which is a clear sign that speculative interest in the markets is back. Excesses have been created with several analyst setting unrealistic targets.

What Led to the Biggest Fall in the Sensex in 5 Years?
The problem that investors fail to understand is that Narendra Modi does not have a magic wand. He does not have control over international developments. One thing that investors fail to realise is that he has no control over a Greexit due to political uncertainty, nor does he have control over falling crude prices.

The biggest players in the Indian markets are foreign funds and if things turn sour globally, they will be the first to exit. In fact, they net sold in the cash markets to the tune of Rs 1500 crores on Tuesday. Never mind if India is growing at 8 per cent annually or interest rates are falling. The bottomline is that if things go wrong in any part of the globe, be rest assured that Indian markets would fall faster then several other markets, because of the huge investment by FIIs in the Indian markets in the last few years. Here are a few reasons why the markets fell on Tuesday.


Greexit from Eurozone

If the election results in Greece throw-up a victory for the radical leftist Syriza party as opinion polls suggest, they are likely to abandon Athens' current austerity course. What this means that a Euro exit for the country is likely and the billions of dollars in support to the country could go down the drain. The result is debt defaults and frightening financial chaos across the globe. Markets could melt if the Jan 25 elections throw-up the much anticipated frightening verdict.

Crude Oil prices and markets

Fast falling crude oil prices is also another concern, though it immensely benefits India in the form of lower fuel prices. However, the worry is that if crude prices continue to fall it could make shale oil production in the US unviable. This could lead to debt defaults by firms that are engaged in shale oil production. Another round of financial chaos. The other worry is that it would severely restrain budgets of the Middle East countries compounding woes there. How far it would remain so is the big question.

From here on, expect increased volatility in the markets, it's very difficult to say which way the markets would be headed. India was one of the best performing markets after the Chinese markets until last year. It remains to be seen if it does so in 2015. We would bet against it given the uncertainty in the markets. Can't throw caution to the winds anymore.

Story first published: Wednesday, January 7, 2015, 8:57 [IST]
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