D-Street bulls in ICU: Five factors behind Sensex's 2,900-pt crash

An incessant selling in the stock markets following US travel ban on European countries and coronavirus being declared pandemic by WHO forced Nifty into the bear market on Wednesday.

Spooked bond inventors and unabated selling by foreign investors have also not helped domestic shares. BSE Sensex closed down 2,919 points at 32,778 while the NSE Nifty settled at 9,590, down 868 points, biggest drop in history in absolute terms.

The stocks crash wiped out Rs 11.27 lakh crore of equity investors' wealth within hours.


Here is what caused the massive selloff:

Coronavirus: A pandemic
The World Health Organisation declared the new coronavirus outbreak a pandemic, sounding alarms in the markets across the world. A pandemic is an epidemic of worldwide proportions, affecting most countries.

"Pandemic is not a word to use lightly or carelessly," WHO chief Tedros Adhanom Ghebreyesus said, but he stressed that "describing the situation as a pandemic does not change WHO's assessment of the threat posed by the virus."

The number of cases in over 100 countries around the world has risen to more than 1,24,000, with over 4,500 deaths, including a jump in fatalities in Iran and Italy in particular.

Travel bans
With the WHO declaration, the United States will suspend all passenger travel from Europe, except the UK, on Friday for the next 30 days to stop the spread of coronavirus. This threatens a smooth functioning of businesses, especially those that have significant exposure to the US.

However, Trump said trade will not be affected by the restrictions. Markets, nonetheless, panicked and sold their holdings pushing the US stocks in bear market territory.

Back home, India suspended all visas, except for a few categories such as diplomatic and employment, till April 15 to prevent the spread of coronavirus as 10 new cases were reported, taking the total number of patients in the country to 60.

India has also prohibited entry of any international cruise ship, crew or passenger with travel history to coronavirus-hit countries post to its major ports till March 31.

FII selling continues unabated
Foreign institutional investors (FIIs) have continued selling Indian stocks. In March alone, they have withdrawn a net Rs 20,831 crore from domestic markets. Since February 24, FIIs have been net sellers every day, as per NSE data.

Dalal Street experts reasoned that the selloff has been largely due to ETF redemptions. With investors liquidating their investments, money managers have been forced to sell off, further putting pressure on domestic stocks.

Uncertainty in bond market
Uncertainty in the bond market due to some unfavourable proposal by the Reserve Bank of India has spooked investors. In the draft plan to restructure YES Bank, the banking regulator proposed to write down additional tier I (AT1) bonds, surprising money managers.

Many mutual fund investors stand to lose if RBI goes with its proposals. Analysts have warned that the AT1 bond market could die in case RBI provides no relief.

"India's financial system has come under serious stress due to the series of crises starting with PNB and then aggravating with IL&FS, DHFL and PMC Bank. And now with the full blown crisis in YES Bank, the situation has become grave. It is important that we learn from the mistakes and failures including inadequacies in auditing, credit rating and regulatory supervision," said VK Vijaykumar, Chief Investment Strategist at Geojit Financial Services.

Global market selling
Massive selloff in the major markets also dampened the mood on the Street. MSCI's broadest index of Asia-Pacific shares outside Japan fell 3.2% and touched its lowest level since early 2019, while Japan's Nikkei crumbled 5.3%.

In the overnight trade, the Dow Jones Industrial Average fell 1,464.94 points, or 5.86 per cent, to 23,553.22, entering bear market. The S&P 500 lost 140.85 points, or 4.89 per cent, to 2,741.38 and the Nasdaq Composite dropped 392.20 points, or 4.7 per cent, to 7,952.05.

European shares were also staring at opening deep in red as Euro Stoxx 50 futures plunged 8.3% to their lowest levels since mid-2016.