What caused the recent slump in Indian and Asian stock markets?

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What caused the recent slump in Indian and Asian stock markets?
The Indian and Asian stock markets witnessed a sharp fall on Wednesday, January 17, 2024, amid weak global cues and disappointing corporate earnings. The Sensex plunged by over 1300 points, while the Nifty fell below the 22,000 mark, erasing the gains made in the previous sessions. The Asian markets also suffered losses, as China reported lower-than-expected GDP growth and rising unemployment. Here are some of the key factors that contributed to the market sell-off:


HDFC Bank Q3 results

The biggest culprit of the market fall on Wednesday was the December quarter result for HDFC Bank, India’s largest private sector lender. The bank reported a 19% increase in net profit, but missed the analysts’ estimates by a wide margin. The bank also saw a decline in its net interest margin, a key measure of profitability, and a rise in its bad loans. The HDFC Bank results raised concerns over the valuation multiples and the growth prospects of the banking sector, which has a high weightage in the benchmark indices. The HDFC Bank stock fell by over 7%, dragging down other bank stocks like SBI, ICICI, Kotak Mahindra and Axis Bank.


Rising geopolitical tensions in the Middle East

Another factor that spooked the investors was the escalating conflict between Israel and the Palestinian militant group Hamas in the Gaza Strip. The violence, which started on January 13, has claimed over 200 lives and injured thousands more. The war has also disrupted the oil supply and increased the risk of a wider regional crisis. The rising geopolitical tensions have dampened the global market sentiment and increased the demand for safe-haven assets like gold and US Treasuries. The Indian market, which is dependent on oil imports, also felt the pressure of the rising crude prices and the weakening rupee.


China GDP impact

China, the world’s second-largest economy and a major trading partner of India and other Asian countries, reported a lower-than-expected GDP growth of 6.8% for the December quarter, compared to 7.1% in the previous quarter. The slowdown was attributed to the impact of the Omicron variant of Covid-19, which led to lockdowns and travel restrictions in several provinces. China also reported a higher-than-expected unemployment rate of 5.2% in December, indicating a weakening labor market. The China GDP data had a negative impact on the Asian markets, especially Hong Kong, Korea and Taiwan, which have close economic ties with China.


US Fed tapering and inflation fears

The US Federal Reserve, the central bank of the world’s largest economy, has announced that it will reduce its monthly bond purchases by $30 billion starting from January, as part of its plan to normalize its monetary policy amid a strong economic recovery. The Fed tapering, which implies a reduction in the liquidity and stimulus provided by the central bank, has raised concerns over the impact on the emerging markets, which rely on foreign capital inflows. The Fed tapering has also increased the expectations of a faster interest rate hike by the Fed, as inflation in the US remains high and above the Fed’s target of 2%. The rising US bond yields and the strengthening US dollar have put pressure on the currencies and the bond markets of the emerging economies, including India.


Profit booking and valuation concerns

The Indian and Asian markets have been on a strong rally in the past few months, reaching record highs on the back of robust corporate earnings, vaccine rollouts, and positive economic indicators. However, some analysts have warned that the markets have become overvalued and due for a correction. The recent market fall may be seen as a healthy correction and an opportunity for profit booking by some investors, who may have taken advantage of the high valuations and the positive momentum. The market may also witness some volatility and consolidation in the near term, as investors await more cues from the upcoming budget, the quarterly results, and the global developments.



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