Five reasons behind the stock market crash on December 19

SUMMARY

SENSEX has plunged 2,830 points, or 3.5%, cumulatively in the past four sessions, while the NIFTY has fallen almost 800 points, or 3.3%, so far this week. The market fall has wiped out nearly ₹8 lakh crore of investors’ wealth.

This week's selloff has wiped out nearly ₹8 lakh crore of investors’ wealth.

India’s equity benchmark indices fell over 1% in trade on Thursday, December 19, marking the fourth consecutive session of decline. The selloff was broad-based across sectors.

Taking Thursday’s decline into account, the SENSEX has nosedived 2,830 points, or 3.5%, cumulatively in the past four sessions, while the NIFTY has fallen over 800 points, or 3.3%.

The selloff has wiped out nearly ₹8 lakh crore of investors’ money this week, with a market capitalisation of BSE-listed companies falling to ₹4,49,65,595 crore on Thursday compared to 4,57,09,259 crore on Friday, December 13. But, what’s weighing down the markets?

Here are the five key factors behind today's stock market crash on December 19:

US Fed revised outlook

The US Federal Reserve cut its key interest rate by 25 basis points on Wednesday, in line with market expectations. However, investors were caught off guard by the rate-cut outlook for 2025.

The US central bank lowered the Fed Funds rate to a range of 4.25% to 4.5% but projected interest rates to fall to only 3.9% by the end of 2025 instead of 3.4% projected earlier. This hinted at just two rate cuts next year compared with earlier expectations of three to four rate cuts.

The revised guidance by the US Federal Reserve spooked investors and led to an equity selloff.

Fall in global stock markets

Wall Street reeled under selling pressure after the Fed policy outcome, with the Dow Jones dropping 1,123 points, or 2.6%, the Nasdaq falling 716 points, or 3.6%, and the S&P 500 tumbling over 178 points, or 3%. This created a ripple effect across global markets, with Asian stocks too taking a hit.

Asian markets traded lower on Thursday, with Japan’s Nikkei down 0.8%, China’s CSI 300 slipping 0.47% and Hong Kong’s Hang Seng falling 1.28%.

Indian rupee at record low

The Indian rupee hit an all-time low of 85.3 against the US dollar on Thursday, weighing down the market sentiment even further. The depreciation in the rupee against the dollar essentially means that investors would prefer to buy dollar-based investments over those dominated by the rupee (such as Indian equities or gold). The weakness in the Indian currency puts more pressure on domestic stock markets.

FIIs pull out over ₹8000 cr since Monday

Foreign institutional investors (FIIs) have been consistently selling off Indian equities for the past few sessions, contributing majorly to the correction in the domestic stock markets. FIIs have been net sellers since Monday and sold equities worth ₹1,316.81 crore on December 18.

The strengthening dollar index, which hit a two-year high on Thursday, makes returns on Indian equities unattractive for FIIs. Consequently, foreign investors are seen in a withdrawal mode.

Uncertainty on Q3 earnings

Earnings for the second quarter ended September 2024 (Q2 FY25) were a major disappointment for the stock markets. Another blow came from GDP (gross domestic product) growth falling to 5.4% during the second quarter. Amid such a scenario, investors seem to be cautious as the third quarter ends in December 2024 and are gearing up for the upcoming earnings season on a back foot.