Just when everyone thought that riding on the country's robust economic growth, the stock markets in India would maintain their upward journey,a rude shock came in the form of a financial disaster originating from far off USA. The subprime crisis that started in the American financial market has taken all large global stock markets by storm. India's benchmark index BSE Sensex has lost almost 1800 points or 11 per cent from its peak of around 15,700.The subprime crisis or the mortgage crisis is actually the result of financial engineering, considered to be an innovative move earlier, where borrowers with lower creditworthiness were given generous loans by banks at a rate of interest higher than the prime rates. With the risk taken off from the bank's portfolio, they lent again and again to the subprime borrowers and the pie became bigger and bigger. But the artificial boom created with easy money went bust when the property prices in the US crashed and borrowers started defaulting.
As the US and European lenders suffered huge losses, they started booking profits by selling their stock holdings in emerging markets like China, Russia, Brazil, India etc, leading to a market crash. To gauge the impact of foreign investment on the Indian market, consider the following: foreign investment in Indian stocks now stands at $200 billion or Rs 810,000 crore. And hedge funds,  account for 25 per cent of foreign investment. Moreover, since foreign investors hold significant stakes in the Sensex stocks, when they pressed the sell button, the market collapsed like a house of cards.
The most important lesson to learn from this crisis is that no matter how strong our economy is, stock markets will be influenced by global developments. Another take from this crisis is that the world famous credit rating agencies, the so-called whistle blowers of financial risks, failed miserably to anticipate the magnitude of the financial crisis. No one has a clear idea how deep the subprime crisis is – estimates vary from $150 billion to $300 billion, and how long it will last. The biggest lesson for retail investors, perhaps, is the reiteration of the fact that investment in shares is inherently risky at any point of time, no matter how favourable the conditions are.