Stock Market Crash: Israel-Iran war to FII outflows—5 reasons why Sensex, Nifty plunged today amid volatility

Stock Market Crash: Domestic equity benchmarks Sensex and Nifty 50 extended losses for the fifth straight session on Friday, October 4, in an exceptionally volatile session, and logged their worst week in over two years amid weak geopolitical tensions and foreign outflows. Today's crash comes after a two per cent decline seen in the previous session.

The frontline indices lost about 4.5 per cent each for the week, their worst since June 2022, with most of the decline due to a two per cent slump on Thursday. Overall the indices have ended the truncated September 30-October 4 week after three straight weeks of positive returns. From their record highs scaled on September 27, the benchmarks have dropped over five per cent.

Also Read: Market Close: Sensex, Nifty slide for 5th straight session, crash 1% amid Israel-Iran war worries

Falling for the fifth day running on Friday, the 30-share BSE Sensex tumbled 808.65 points or 0.98 per cent to settle at 81,688.45. The benchmark hit a low of 81,532.68 and a high of 83,368.32 during the day, reflecting a wild swing of 1,835.64 points during the session.

The NSE Nifty 50 slumped 235.50 points or 0.93 per cent to settle at 25,014.60. Intra-day, it hit a high of 25,485.05. During the last leg of the trade, the benchmarks again slipped into the red. Sensex shed 1,835.64 points from the day's high of 81,532.68, while the Nifty tanked 518.25 points to its day's low of 24,966.8.

The broader, more domestically focused small and mid-caps fell 2.5 per cent and 3.2 per cent for the week. Mukesh Ambani-led Reliance Industries, the second-heaviest Nifty 50 stock, shed 9.2 per cent, leading the index's losses this week.

Over the past five trading sessions, Indian stock markets have experienced a substantial decline in investor wealth, with approximately ₹13 lakh crore being wiped out. Last week, the total market capitalization of Indian stocks was ₹479 lakh crore, but this week it has dropped to ₹466 lakh crore, marking a steep loss of ₹13 lakh crore in just five sessions.

The escalating Middle East conflict raised alarm bells that crude supplies from the top oil-producing region may be disrupted. This has pushed crude oil prices higher, hurting net importers such as India. The spike in global crude prices on supply uncertainty due to geopolitical tensions has dented market sentiments.

D-Street analysts also attributed the market drop this week to aggressive foreign selling. Foreign outflows from Indian markets hit a record high on Thursday as investors directed inflows into China after its recent stimulus measures.

Indian stock market benchmarks have nosedived for five straight days as investors book profits at record-high levels. D-Street experts highlight the following five key factors that may have triggered the recent profit booking:

Stock market crash: 5 reasons why Sensex, Nifty 50 plunged today

 

1.Israel-Iran war: Geopolitical tensions in the Middle East

Tensions are high in the region after Israel killed Hezbollah leader Sayyed Hassan Nasrallah in Beirut, followed by increased attacks against the Hezbollah militia in Lebanon and Houthi militia in Yemen.

The ongoing tensions in the Middle East, particularly between Israel and Iran, have added volatility to global markets, especially with crude oil prices rising by over five per cent in the past two days. The situation escalated after a missile strike in Beirut and retaliatory threats between Israel and Iran. 

The increase in geopolitical tensions between Israel and Iran weighed on risk assets. In global news, mounting geopolitical tensions have contributed to a shaky start in October for the stock market," said Shrikant Chouhan, Head of Equity Research at Kotak Securities.

Iran launched over 180 ballistic missiles at Israel. Fears are mounting that Israel could retaliate by targeting Iran's major oil fields, which would likely push oil prices even higher. Experts say the fresh escalation has made investors cautious, driving them away from risker equities and betting on safe-haven assets like gold.

"Polymarket, a decentralized prediction platform, currently forecasts a 38 per cent chance of an Israeli response to Iran's attack by Friday. This could lead to a potential shift of capital into safe-haven assets like gold," said Justin Khoo, Senior Market Analyst APAC, VT Markets.

2.FII outflow

Foreign Institutional Investors (FIIs) offloaded equities worth ₹15,243.27 crore--at a record high on Thursday, according to stock exchange data. Foreign portfolio investors (FPIs) were the most significant sellers during the recent market downturn, withdrawing nearly ₹30,613 crore from Indian markets over the last three trading sessions. 

A substantial portion of this selling occurred on Thursday alone, amounting to ₹15,243 crore, marking the largest daily outflow by foreign investors in the last four years. There are growing concerns that FPIs might shift their investments back to China, especially as Beijing has implemented a series of policy measures to revive its struggling economy and bolster its capital markets. 

"The last three days have witnessed huge FII selling of ₹30,614 crore in the cash market. FIIs are moving money from expensive India to cheap Hong Kong on expectations that the Chinese authorities monetary and fiscal stimulus will stimulate the Chinese economy and improve the earnings of Chinese companies.

It remains to be seen how this Chinese recovery hopes to play out. The market direction in the near-term will be influenced by the tug-of-war between the FIIs and DIIs," said VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
 

3.SEBI's new regulatory F&O trading norms

Capital markets regulator Securities and Exchange Board of India (SEBI) implemented six of seven measures recommended by an expert panel to cool the exuberance in India's booming derivatives market and curb the rush in F&O trading. 

The six that could impact volumes the most are the reduction in weekly expiries per exchange from five to just one, the increase in lot size to ₹15-20 lakh from ₹5-10 lakh, and the removal of the calendar spread benefit on expiry day. SEBI’s latest F&O regulations introduce changes that will impact market participants in varying ways, which is why the stock market is taking time to digest these announcements.

Discount brokers like Zerodha and Groww, which cater to retail traders, may experience lower trading volumes due to the increase in contract size and the restriction of weekly expiries to just one benchmark index per exchange. In contrast, traditional brokers and wealth managers may face less impact, as their client base consists of more institutional and high-net-worth individuals. 

The limitation on weekly expiries could benefit the BSE, as it may attract traders shifting from the NSE. While discount brokers and retail traders are expected to adjust to these changes, AMCs and depositories will likely remain unaffected. RTAs may experience operational changes but without significant disruptions," said Krishna Appala, Senior Research Analyst at Capitalmind Research