Why did Sensex and Nifty crash on Friday?

Post Monday's shock that quivered the Indian stock markets to witness the biggest intraday fall in over two months, investors cheered as Sensex recovered by around 1,300 points during the latter part of the week.  

However, market sentiments quickly turned sour during Friday's trading session as the domestic benchmark indices-Sensex and Nifty came face-to-face with their respective biggest intraday falls since May 2020. 

Sensex tumbled by around 2,000 points while Nifty fell sharply by around 600 points. On Friday, the volatility index i.e. India VIX jumped by around 23 per cent. 

Some of the reasons for the decline include- 

A rise in US bond yield 

Bond yields are generally considered to be inversely proportional to equity returns and hence, usually, it is seen that when bond yields increase, equity markets tend to underperform. On Thursday, the 10-year yield climbed to 1.61 per cent, which is the highest in a year. The bond market factors a possible rise in inflation. If the cost of borrowing rises, the value of companies tends to fall according to the discounted cash flow (DCF) method. Further, equity values fall, which is perceived as a negative element for equity markets. 

Selling pressure 

Currently, it is seen that the majority of the stocks in India have doubled and investors are now tempted to sell their holdings and book profits before any future market correction wipes off their gains. 

Market correction and rise in Coronavirus cases 

It is assumed by investors that a nationwide lockdown may not be implemented in the wake of the rising Coronavirus cases as restrictions & region-wise lockdowns can surely cause damage to the business operations. Currently, markets are at high valuations, and since the markets witnessed a sharp rise, the decline could also be a sharp one and further corrections may also continue.