The Indian stock market, for all its potential for wealth creation, can be a turbulent place. Like a ship navigating a fierce storm, investors must weather periods of volatility, where stock prices plunge and economic uncertainty reigns. The stock market has weathered various adverse conditions, including scams like the Harshad Mehta and Ketan Parekh scandals, the global financial crisis of 2008, the bursting of the dot-com bubble, political uncertainty, natural disasters, geopolitical tensions, and policy reforms such as demonetisation and GST implementation. Despite these challenges, the market has shown resilience, bouncing back from setbacks and continuing its long-term growth trajectory. Investors have witnessed periods of volatility but have also benefited from India’s robust economic fundamentals, demographic dividend, and potential for sustainable growth.

This article mainly focuses on how the market recovered from all the adverse events. Let us first start with understanding briefly what these events were and its impact:

– Harshad Mehta Scam (1992)

The Harshad Mehta scam, also known as the securities scam of 1992, was a massive financial scandal that rocked India to its core. Stockbroker Harshad Mehta manipulated the stock market by exploiting loopholes in the banking system, leading to a surge in stock prices.

The scam was exposed in April 1992, leading to a massive sell-off in the stock market and the collapse of several banks and financial institutions.

Impact:

– The Indian stock market experienced a brutal downturn in the wake of the scam. When the fraud was exposed, the Nifty 50 Index was 1,280 later it fell to 599 in a few months & this was the lowest during this event. This dramatic crash exposed the scam’s devastating impact, not only eroding investor wealth but also shattering confidence in the integrity of the Indian financial system.

– Dot Com Bubble (2000)

The dot-com bubble burst in 2000 significantly impacted the global economy, including India. Fuelled by speculation and inflated valuations, the crash triggered a wave of stock sell-offs, tightened investment restrictions, and widespread job losses in the tech sector.

Impact:

– The bubble began to burst in early 2000, and by the end of 2001, the Nasdaq Composite Index had lost over 75% of its value. The crash had a ripple effect throughout the global economy, as investors lost confidence in technology stocks and other risky assets.

– It had also affected the Indian markets as the Nifty 50 Index crashed to 854 from 1,603

– Stock prices plummeted, and many companies went bankrupt. The aftermath of the dot-com bubble was felt around the world, with many economies experiencing a recession.

– Global Financial Crisis (2008)

The global financial crisis of 2008 was the worst financial crisis since the Great Depression. It was caused by a combination of factors, including the subprime mortgage crisis, the collapse of major financial institutions, and a global economic slowdown.

Impact:

– The crisis had a significant impact on stock markets worldwide, including India. India’s stock markets experienced a sharp decline during this period, with the Nifty 50 dropping from over 6,000 points in January 2008 to below 2,000 points in October 2008. This crash was primarily driven by concerns about the global banking and financial sector’s stability.

– Demonetization (2016)

In November 2016, the Indian government made a bold and unexpected move by demonetizing high-value currency notes, specifically the 500 and 1,000-rupee denominations. This sudden policy shift caused a temporary cash shortage within the Indian economy.

The stock market reacted negatively, primarily due to the uncertainty surrounding the demonetization’s impact. Investors were apprehensive about the immediate effects on the Indian economy and worried about potential consequences for corporate profits.

Impact of Demonetization

– The National Stock Exchange’s benchmark index, the NSE Nifty, plummeted by approximately 588

– However, the Indian stock market steadily rebounded over the next several weeks as the government implemented measures to reduce the fiscal impact of demonization.

– Covid- 19 Pandemic (2020)

The COVID-19 pandemic, which began in late 2019, had a severe impact on global stock markets, including India. The impact of the coronavirus pandemic on India has been largely disruptive in terms of economic activity as well as a loss of human lives. Almost all the sectors have been adversely affected as domestic demand and exports sharply plummeted with some notable exceptions where high growth was observed.

Impact:

– The COVID-19 pandemic caused a dramatic plunge in the Indian stock market (Nifty 50 dropping from 11,201 to below 8,281 points) due to economic fears and global uncertainty.

– Stock market volatility continued throughout the pandemic, influenced by news about the virus, government actions, and economic data. The Indian government and RBI responded with stimulus packages, liquidity measures, and regulatory changes to bolster the economy and stock market.

– Russia-Ukraine War

The Russia-Ukraine conflict, rooted in historical and political tensions, escalated with Russia’s actions in Crimea and eastern Ukraine. This sparked a humanitarian crisis and military confrontations. The conflict’s impact reached Indian stock markets, causing a sharp decline as it mirrored global market weakness and rising oil prices.

Impact:

– The escalating tensions had led to a surge in crude oil prices, which posed several risks for India. As India imports more than 80% of its oil requirement, rising oil prices increase subsidies on LPG and kerosene.

– The war caused the Indian rupee to fall against the US dollar, and foreign exchange reserves were drained.

Thus, from the above we understand that from global financial crises to domestic economic upheavals, markets have been tested time and again. However, despite the severity of these events, the markets have shown a remarkable ability to bounce back, demonstrating the robustness of India’s financial ecosystem and the confidence of its investors.

To illustrate this resilience, let’s examine how the Indian stock markets have recovered from some of the most significant adverse events in recent history. The following table provides the immediate impact on the markets and the subsequent recovery periods.

Thus, from the above table we understand the time taken by the markets to revert back to the same levels on a sustainable basis as it were before the event. The maximum time taken from all these events was that by the Global Financial Crisis while the least amount of time was taken by Demonetization. As is visible from the above table, we can see that the recovery time for a major crisis has reduced over time.

Let’s take the scenario of the Global Financial Crisis which had a major impact on the global markets. If one had entered the markets 1 month before the event i.e. the Nifty 50 level was 5,617.10. At the start of the event Nifty 50 was at 6,079.70 as the crisis hit the markets, we can see huge selling off had started and later on the Nifty came down to the 2,524,20 level which was the lowest of that time. The Nifty 50 nearly took 2 years & 8 months to revert to the same level. The time taken to recover from the crisis was due to the magnitude of the crisis. The downturn in the US and European economies led to a massive withdrawal of foreign institutional investments (FIIs) from the Indian markets, causing a sharp decline. Recovery was contingent on the stabilization and recovery of these global economies along with domestic economy, which took time. The crisis led to reduced exports, lower industrial output, and slower GDP growth. It took several quarters for domestic economic indicators to show signs of stabilization and improvement, which directly impacted market recovery.

However, in the case of the Covid-19 pandemic, which was a global pandemic, markets also were affected but recovered quickly. If one had entered the market at the end of the January 2020, the Nifty 50 Index was 12,129,50. When the actual lockdown was imposed the index was at the level of 10,458.40. Later it dropped to the level of 7,610.25 which was the lowest during the period. Global crises inflict deeper damage due to their extensive interconnectedness, exposing systemic vulnerabilities and eroding investor confidence on a global scale. Rebuilding trust and repairing these issues takes a significant amount of time. In contrast, the faster recovery post-pandemic can be attributed to factors like government intervention, a potential shift in investor behavior towards short-term movements, and most importantly, the increased participation of domestic institutional and retail investors, which may have helped absorb market fluctuations and expedite the rebound.

This suggests that a more mature and diversified domestic investor base along with the growing Foreign Investor confidence on the rising India story could contribute to swifter recoveries from future crises.

Conclusion

In conclusion, while adverse market events may cause temporary setbacks, history has shown that the stock market can rebound in the coming months & years. Investors who maintain a long-term perspective and stay resilient during challenging times are often rewarded as markets recover and continue their upward trajectory.

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The article is authored by Mr. Saurabh Gosavi from Team RichVik.