A look at the history of stock market crashes in India

The Stock Market can be a very volatile place. While there are days when the markets are on high, rewarding investors for their investments, there are also days that have caused huge losses to investors. When one invests in the stock market, he/she needs to be prepared for both scenarios.

A stock market crash is when there is an unanticipated severe fall in the indices in a day or few days of trading. While the markets eventually always recover, the impact of such a loss can linger on investor sentiment for years.

While there definitely will be crashes in the future, it is important to look at the history. In this article, let's take a look at some of the biggest crashes in the history of Indian stock markets and their respective reasons. For the purpose of this article, we have taken into account the decline in benchmark index Sensex.

1992- Harshad Mehta Scam

The Harshad Mehta scam was one of the earliest and biggest crashes of Indian stock market history. In 1992, the discovery of the scam led to an over 50 percent fall in the Sensex in just 1 year. In that year, the Sensex cracked by around 2,000 points to around 2,500-level.

Harshad Mehta, known as the 'big bull' of the Indian stock markets, would target a firm, buy a number of its shares pumping up its price and then sell at a profit. But for this to work, he needed a lot of capital, so he took advantage of the regulations in the 1980s and 1990s which prohibited banks from investing in the stock markets.

He took capital from the banks with a promise of high return and invested in stocks, increased their demand, and then sold at a profit and gave a portion of that to the banks. When the scam was exposed, the market experienced one of the biggest falls in its history. On April 28, 1992, the Sensex fell the most during the year, down 570 points which then was nearly 13 percent in one day.

2008 - Financial Crisis

This was another major stock market disaster that was created by a bubble in the US housing market. It not only affected the stock markets but also the economy, businesses, etc. On January 21, 2008, the Sensex dropped by around 1408 points. That day is referred to as Black Monday to date.

After a series of corporate scandals, 9/11 attacks, the US federal reserves lowered the interest rate to 1 percent in 2003 with the aim of boosting the economy. This resulted in the rise of home prices in the US as the mortgage rates dropped. A number of low-income people took up loans to buy houses, however by 2004, the homeownership peaked leading to prices falling. To add to that, the US fed also increased interest rates to over 5 percent. So now the prices of the homes fell and the mortgages increased which the homeowners were unable to pay. Even when they sold their houses, they incurred a loss since the prices were significantly lower than what they bought.

So now the homeowners couldn't pay back the loans they had taken from the lenders. Some major lenders then had to file for bankruptcy since they could not get the money back from the homeowners which led to the onset of the crisis.

Stock markets across the globe fell over the fear of the unknown. There was a widespread change in investor sentiment and a fear that the US economy might go into recession. This led to investors moving funds from emerging markets to stable developed economies where the risk was lower.

By the end of 2008, due to the crisis, the Sensex tanked over 9,700 points from 20,465. It took Sensex around 2 years to make up for that loss again and reclaim the 20,000 levels.

2015 - Devaluation of Yuan

Soon after the markets recovered from the 2008 crisis, the devaluation of the Yuan in 2015 led to another major crash in stock market history. On August 24, 2015, Sensex fell 1,624 points or 6 percent on fears regarding a potential slowdown in the Chinese economy.

This was a result of the devaluation of the Yuan earlier in the month. On August 11, 2015, the People’s Bank of China (PBOC) shocked the stock markets across the globe with three consecutive devaluations of the Chinese yuan renminbi (CNY), which tanked over 3 percent of its value. This led to experts believing that the main reason for this devaluation was to boost exports to help the Chinese economy which was growing at its lowest rate in decades. However, the Chinese government denied the theory.

Due to Yuan's steady appreciation in the past, this sudden decline shook investor confidence leading to a fall in stock markets across the globe. India was particularly affected as this decline in Yuan led to a rise in the dollar which in turn decreased the value of the rupee. Also, a weaker yuan led to more exports from China slowing the demand for Indian products and increasing prices of Indian imports.

All this together led to one of the biggest falls in the Indian stock markets.

2016 - Demonetisation

In November 2016, the Narendra Modi government announced demonetisation in order to crack down on black money where it withdrew notes of ₹500 and ₹1000 from circulation. This sudden step led to a 1,689 points or 6 percent fall in Sensex on November 9, 2016, and it fell below the crucial 26,000-mark. Post demonetization, a number of investors withdrew funds from the share market, some due to lack of money while others, in anticipation of a further fall. All sectors also fell as a result of this exercise with the realty, auto falling the most.

Along with demonetisation a massive rise in NPAs and general weakness in global markets surrounding the US elections also kept the markets on their toes.

2020 - COVID outbreak

The most recent crash came in 2020 after the recent outbreak of COVID which resulted in lockdowns across the world and declining economies. After the World Health Organization (WHO) declared it a pandemic, the stock markets across the globe crashed. Indian stock markets witnessed their largest fall to date on March 23, 2020, when Sensex fell over 13 percent or 3,944 points.

The decline in equity markets continued to post that as well on fears of a decline in economic growth and lockdowns which shut down all manufacturing in the economy across the globe.

These are some of the instances when the Indian stock markets witnessed major crashes for a variety of reasons. However, one must note that while crashes are inevitable in stock markets, so is recovery. In all these scenarios, the markets have eventually recovered, giving even higher returns to investors who did not lose faith.