The stock indices fell like nine pins on Monday. The Bombay Stock Exchanges’ Sensex closed 833 points lower at 16,631 and the National Stock Exchanges’ Nifty dropped by 263 points to 4857. At this level the Sensex, the benchmark index for Indian capital market has lost close to 5500 point from its peak in early January 2008. 

According to a study, investors have lost over Rs 400,000 crore in shares since the beginning of 2008, a loss of unprecedented proportions in such a short period. Since large blue chip companies have shed their market value the most, investors who reposed their confidence on strong financials are badly shaken. In fact, the confidence level has gone so low that even a positive news item like banks cutting interest rates did not make any difference.

It began with the subprime crisis from the developed world, particularly from the US. The subprime or the mortgage crisis resulted from financial engineering, considered to be an innovative move earlier, where borrowers with lower creditworthiness were given generous  bank loans at a rate of interest higher than  prime rates. The balloon filled with hot air of bad loans 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.

Add to it the bad news from within the country. Recent news that the GDP growth rate of the economy will be lower at 8.6 per cent and the news that the rate of inflation has gone above the 4 per cent mark have created doubts about the strength of the economy. The failure of the much hyped Initial Public Offer (IPO) of Reliance Power on the opening day also made investors nervous.

On the listing day on Monday, RPL shares opened weak and closed below the issue price prompting thousands of investors to sell the shares they got on allotment just a few days back. Despite the crash and the overpowering negative sentiment, we must accept that just as stock prices often go up on irrational exuberance, they also slide down many a time on illogical reasoning. Indian economy is certainly on a strong footing and is largely insulated from global developments. Based on a solid economic foundation, in the long run the country will ride out the crisis.