October Freefall: Indian Stock Market Plunges Amid Iran-Israel Conflict, FII Outflow

The current crash in the share market: The Iran-Israel war and China's economic stimulus caused the Indian stock market to plunge sharply, with the Sensex falling 4,100 points in five days. Because of their withdrawal of ₹32,000 crores due to worries about peak values, foreign institutional investors (FIIs) have driven the nifty below important support levels. In only five trading days, the Iran-Israel war and China's stimulus package have combined to launch a bear attack on the Indian stock market, leaving Dalal Street investors with a hole in their wallet of ₹16 lakh crore.

Sensex closed Thursday's session at 809 points after tumbling 1,769 points, and Nifty tested its endurance at the crucial support level of 25,000, falling by about 1%. Since September 27, the Sensex has dropped by ₹15.9 lakh crore to ₹461.26 lakh crore in the previous five trading days. Sensex and Nifty finished the week down 4.3% and 4.5%, respectively, marking its worst week since June 2022.

Amidst what seemed to be an exuberant bull market, institutional investors had already issued warnings about peak valuations. Due to the lower stock values in China, the Chinese stimulus measures hastened the outflow of foreign institutional investment (FII) money from India. Additionally, international investors in developing countries grew extra wary after Iran launched almost 200 ballistic missiles toward Israel on Tuesday in retaliation for the Israeli airstrike in the southern suburbs of Beirut last Friday.

Provisional market data indicates that FIIs had taken out around ₹32,000 crores from Dalal Street in the previous four trading days, up till this Thursday. The largest-ever single-day sale by foreigners occurred on Thursday, when the FII sold for ₹15,243 crores. Money managers have been cutting back on long holdings throughout Asia in order to finance investments in China after the Chinese government announced a number of policies aimed at promoting growth.

Key Reasons for Market Decline on October 7, 2024:

1.    Iran-Israel Conflict: Escalated geopolitical tensions, causing international market unease.
2.    China’s Stimulus Package: Shift of FII investments towards China for growth opportunities.
3.    High Valuation Concerns: FIIs warned of peak valuations, accelerating withdrawals.
4.    Strong FII Outflow: ₹32,000 crore withdrawn from Indian markets in just four days.

Will this catastrophe continue?

• Given that the Chinese market has had intermittent gains over the past two to three years, not all investors are prepared to buy the China story.
• Rajiv Jain of Florida-based GQG Partners recalls that there was one "reopening trade" in late 2022 as well when a purchasing rush faded out after a few months.
• "Essentially, they are a trade. It's a pleasant transaction. However, is it truly feasible to invest in it for three or five years?" Jain told Bloomberg.
• Returning to Dalal Street, the Nifty saw six corrections in 2024, with the index declining by around 5% to 6%.
• The market will be watching the results of the assembly elections in Jammu and Kashmir and Haryana as well as the Q2 earnings season, which starts the next week.

To summarize

The Sensex plunged 4,100 points in five days as the Iran-Israel conflict and China’s economic stimulus led FIIs to withdraw ₹32,000 crores, pushing Indian markets into sharp decline. Nifty and Sensex recorded their worst week since June 2022, with the market capitalization falling by ₹16 lakh crore.