When something happens in the stock market after a gap of almost 28 years, you know that the situation is not what gets repeated on a routine basis. This is the second worst performance by the Nifty in nearly 3 decades and hints at a possible deeper structural problem in the market. Whether it is a problem or it is just a flash in the pan; is something we will only know in the coming days. It is, however, certain that the correction in the Nifty is something to worry about. 

If you have even been a cursory market observer for the last 5 months, there is one thing that would strike you. The fall in the Nifty and the Sensex has been persistent and has come in the face of dwindling volumes. Most brokers admit that the volumes at most brokerages have fallen by 30% to 40%, with the biggest impact seen on the futures and options front. However, even the cash market volumes dried up. For the low-cost broking houses that thrived on a reverse broking model (free cash market trades and charged F&O trades), the hit on volumes has been much higher. The fall in investor sentiments is really big. 

It is hard to put your finger on the pulse of the current problem, but several of these factors have been responsible. For starters, the slew of measures put out by SEBI to curb speculation in the stock markets has been partially responsible. Also, the high inflation and expectations of high inflation has made people more cautious about putting money into these speculative applications. Investors and even traders are going easy on high-risk trades. The first indications were visible when the SIP stoppage ratio surged. The other big reason is that there has been too much money chasing too few stocks and that is starting to unravel. Valuations were out of line for a long time and FPIs are not happy any longer. 

There are 2 sides to this story. FPI selling is not the biggest of problems. Even after the pandemic, the FPIs did come back in droves. If the FPIs see a combination of economic growth, solid corporate results, and reasonable level of valuations; they would be more than willing to come back. However, that is not how retail investors operate. If the retail investors decided to abandon the markets, they take a long time to come back. Retail investors have lost too much of their money in IPOs, MFs, and speculative secondary market stocks. It will be some time before they recoup. Till then, business would be tough!