Why Are Markets Turning Volatile and Risks to Watch Out For

As of August 05, 2024, both the S&P BSE Sensex and the Nifty 50 indices have exhibited significant volatility. The S&P BSE Sensex experienced fluctuations due to a range of domestic and global factors, falling over 2,000 points to close at 78,774. Meanwhile, the Nifty 50 ended the day 668 points lower, closing at 24,050.

Despite occasional rallies driven by positive corporate earnings reports and encouraging economic data, investor sentiment has been dampened by concerns over inflation, interest rate hikes, and geopolitical tensions.

The S&P BSE Sensex has struggled to maintain a consistent upward trajectory, reflecting broader market uncertainties and cautious investor behaviour. Similarly, the Nifty 50, has experienced sharp movements influenced by sector-specific developments and macroeconomic indicators. While sectors like information technology and pharmaceuticals have shown resilience, others such as banking and real estate have been more susceptible to economic pressures.

Overall, the recent benchmark performance highlights the market’s mixed responses to economic policies, corporate earnings, and global market trends, underlining the prevailing volatility in the Indian equity market.

After FM Nirmala Sitharaman’s announcement for the Interim Budget 2024, Indian equity market benchmarks the Nifty 50 and the S&P BSE Sensex oscillated between gains and losses and traded in a range.

The budget, which was anticipated to introduce significant reforms and policy changes, has had a profound impact on investor sentiment and market dynamics. This article explores the reasons behind the increased market volatility post-budget and highlights the key risks that investors need to be aware of in the current economic environment.

[Read: Sensex at 80,000! How to Approach Equity Mutual Funds Now]

The unveiling of the Modi 3.0 budget on July 23rd, 2024, has left the financial markets in a state of heightened volatility. Investors, analysts, and policymakers alike are grappling with the immediate and long-term implications of the new economic measures introduced by the Indian government.

While the budget aims to steer the economy towards growth and stability, it has also introduced a series of uncertainties that are causing fluctuations across the stock markets. Understanding the reasons behind this volatility is crucial for investors looking to navigate these turbulent times.

Factors Influencing Market Volatility Post-Modi 3.0 Budget for FY 2024-25

Despite the budget’s comprehensive and ambitious nature, several factors have contributed to increased market volatility. These include:

[Read: The Mutual Fund Industry’s Expectation from Modi 3.0’s Full Budget]

• Uncertainty Around Implementation

  
  

  One of the primary reasons for market volatility is the uncertainty surrounding the implementation of the budgetary proposals. Investors are wary of potential delays or challenges in executing the ambitious infrastructure projects and social welfare programs. The government’s track record in the timely implementation of large-scale projects has been mixed, leading to skepticism among market participants.

• Tax Reforms and Their Impact

  
  

  The introduction of new tax regimes and modifications to existing ones has created uncertainty among businesses and individual taxpayers. Changes in personal and corporate tax rates, along with the introduction of new tax slabs, have left many wondering about their financial implications. This uncertainty has led to cautious behaviour among investors, contributing to market volatility.

• Inflationary Pressures

  
  

  The significant increase in government spending, particularly on infrastructure and social welfare, has raised concerns about inflationary pressures. Higher government expenditure can lead to increased demand for goods and services, potentially driving up prices. Investors are wary of the inflationary impact of the budget, which can erode purchasing power and corporate profits.

• Fiscal Deficit Concerns

  
  

  The Modi 3.0 budget has set ambitious spending targets, which could result in a higher fiscal deficit. The prospect of an increased fiscal deficit has raised concerns among investors about the sustainability of government finances. A higher deficit can lead to increased borrowing, higher interest rates, and potential downgrades of the country’s credit rating, all of which can contribute to market volatility.

• Global Economic Environment

  
  

  The global economic environment plays a significant role in influencing market behaviour. The Modi 3.0 budget was announced amidst a backdrop of global economic uncertainty, including concerns about a potential slowdown in major economies and geopolitical tensions. These external factors have exacerbated market volatility, as investors react to both domestic and international developments.

Risks Investors Should Watch Out for

Given the increased market volatility, it is essential for investors to be aware of the key risks and take proactive measures to manage them. Here are some of the primary risks to watch out for in the current economic environment:

1. Liquidity Risk

Liquidity risk arises when investors are unable to buy or sell assets without significantly affecting their prices. During periods of market stress, liquidity can dry up, leading to sharp price movements and increased volatility. Investors should be cautious about holding illiquid assets and ensure they have sufficient liquidity in their portfolios to meet potential cash flow needs.

2. Credit Risk

Rising default rates, whether at the corporate or sovereign level, can lead to market instability and increased volatility. Investors should carefully assess the creditworthiness of their investments and consider diversifying their portfolios to mitigate credit risk.

3. Market Risk

Market risk, or systematic risk, is the risk of losses due to overall market movements. Factors such as economic recessions, geopolitical events, and policy changes can lead to broad market declines. To manage market risk, investors should diversify their portfolios across different asset classes and geographic regions.

[Read: Best Mutual Funds for the Next 10 Years]

4. Inflation Risk

Inflation risk is the possibility that rising prices will erode the purchasing power of investments. With concerns about inflationary pressures following the budget, investors should consider assets that can provide a hedge against inflation, such as real estate, commodities, and inflation-linked bonds.

5. Interest Rate Risk

Interest rate risk arises from changes in interest rates, which can affect the value of fixed-income investments. Higher interest rates can lead to lower bond prices and increased borrowing costs for businesses. Investors should monitor central bank policies and consider adjusting the duration of their fixed-income portfolios to manage interest rate risk.

6. Regulatory Risk

Changes in regulations and policies can impact various industries and markets. The Modi 3.0 budget introduced several regulatory changes, particularly in tax and environmental policies. Investors should stay informed about potential regulatory changes that could affect their investments and consider the impact of these changes on their portfolios.

7. Geopolitical Risk

Geopolitical risk refers to the potential impact of political and geopolitical events on financial markets. Ongoing geopolitical tensions, such as trade disputes and conflicts, can create uncertainty and volatility. Investors should stay informed about global developments and consider the potential impact of geopolitical events on their portfolios.

8. Environmental and Climate Risks

Environmental and climate risks are increasingly influencing market dynamics. As the world grapples with climate change, the financial impact of environmental events is becoming more pronounced. Natural disasters, regulatory changes related to environmental policies, and the transition to a green economy can all impact market stability. Investors should consider the environmental and climate risks associated with their investments and look for opportunities in sustainable and green assets.

[Read: From Volatility to Opportunity: Reviewing Portfolios Amid India’s 2024 Market Trends]

Strategies for Navigating Market Volatility

In light of the increased market volatility and the various risks outlined, investors need to adopt strategies that can help them navigate these uncertain times. Here are some strategies to consider:

• Diversification

  
  

  Diversification is a fundamental strategy for managing risk and reducing the impact of market volatility. By spreading investments across different asset classes, sectors, and geographic regions, investors can mitigate the impact of adverse events on their portfolios. Diversification may help smooth out returns and provide a buffer against market fluctuations.

• Risk Management

  
  

  Effective risk management is essential for navigating market volatility. Investors should regularly assess the risks in their portfolios and implement measures to manage them. This can include setting stop-loss orders, using hedging strategies, and maintaining an appropriate asset allocation based on risk tolerance and investment goals.

• Long-Term Perspective

  
  

  Maintaining a long-term perspective can help investors stay focused on their financial goals and avoid making impulsive decisions based on short-term market movements. While market volatility can be unsettling, it is important to remember that markets have historically recovered from downturns over the long term. Staying disciplined and adhering to a long-term investment strategy can help investors ride out periods of volatility.

• Staying Informed

  
  

  Staying informed about market developments, economic trends, and policy changes is crucial for making informed investment decisions. Investors should regularly review their portfolios, stay updated on news and analysis, and seek advice from financial professionals when needed. Being well-informed can help investors anticipate potential risks and opportunities.

• Flexibility and Adaptability

  
  

  Flexibility and adaptability are key traits for navigating volatile markets. Investors should be prepared to adjust their investment strategies based on changing market conditions and new information. This may involve rebalancing portfolios, taking advantage of market opportunities, or adopting defensive positions during periods of heightened uncertainty.

In conclusion, while market volatility can be unsettling, it also presents opportunities for astute investors. By comprehending the factors driving volatility and remaining vigilant about the associated risks, investors can make informed decisions to navigate the market’s inevitable fluctuations, capitalize on opportunities in the evolving economic landscape, and ultimately achieve their financial goals.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.

 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.