3 reasons why Indian markets tumbled today

The Indian stock market experienced a significant downturn on Thursday, October 3, with both the Sensex and Nifty 50 indices falling by nearly 2%. This sharp decline can be attributed to three primary factors: rising geopolitical tensions in the Middle East, recent regulatory changes implemented by the Securities and Exchange Board of India (Sebi) to mitigate speculative trading in the derivatives market, and a redirection of investment flows towards China following its economic stimulus measures.

By 2:30 PM, the 30-share Sensex had decreased by nearly 1,800 points, while the 50-share Nifty had dropped close to 550 points.

1. Geopolitics

Concerns regarding a potential full-scale war between Iran and Israel, amidst escalating conflicts in the Middle East, significantly impacted market sentiment.

On Tuesday, Iran launched approximately 200 ballistic missiles at Israel, marking a sharp yet brief escalation in hostilities between the two nations, with Prime Minister Benjamin Netanyahu pledging a strong response.

Brent crude oil prices approached $75 per barrel after rising nearly 3% over the previous two sessions, while West Texas Intermediate hovered around $71.

The oil market remains focused on the ongoing crisis in the Middle East, which follows a year of instability as Israel confronts Iran and its allied groups in Gaza, Lebanon, Yemen, and other regions.

The region represents approximately one-third of the global supply, raising concerns among traders that recent escalations could disrupt flows if energy facilities are targeted or supply routes are obstructed.

Pooja Sriram, an economist at Barclays in the United States, maintains that there is a prevailing risk-on sentiment among investors, who appear confident despite apprehensions regarding a potential deterioration of the geopolitical landscape.

Sriram forecasts that crude oil prices may reach between $85 and $90 per barrel by year-end, driven by anticipated supply increases from the UAE and Saudi Arabia. She noted, “If the conflict persists and intensifies, it is likely to be counterbalanced by the inventory situation as well.”

2. Sebi

The Indian market has also been impacted by the Sebi six-step initiative aimed at limiting retail participation in speculative index derivatives trading.

On October 1, Sebi introduced measures projected to significantly decrease trading volumes by 30-40%, raising concerns about liquidity within the derivatives market.

This initiative is part of Sebi’s strategy to mitigate excessive speculation, which frequently results in substantial losses for retail investors.

3. China

In contrast, Chinese stocks have maintained their upward trajectory following the easing of homebuying regulations in three of the nation’s largest cities.

Adrian Mowat indicates that India is experiencing significant foreign outflows as tactical investments shift towards China.

The Chinese market has surged nearly 30% from its lows in September, marking a historic rally as government stimulus measures have effectively attracted investors back to a market that had previously been one of the poorest performers globally.

China now accounts for over one-third of the global market capitalization gains, with notable improvements in valuations. The Shanghai Shenzhen CSI 300 Index currently trades at 13.4 times its projected one-year forward earnings.

Christopher Wood, the Chief Investment Officer at Jefferies, has recently decreased his investment in Indian equities by one percentage point, attributing this decision to a significant counter-trend rally occurring in China. 

In contrast, he has raised his investment in China by two percentage points, while still holding a slight underweight position despite the ongoing rally.