Nifty’s Resilience to Single-Day Falls
Nifty index, which represents the top 50 companies listed on the National Stock Exchange of India, has shown remarkable resilience over the past decade. This is evident from the recovery data after significant single-day falls of 5% or more since 2014.
Significant Falls and Recovery Times
In the last ten years, the Nifty index has experienced seven instances of single-day drops greater than 5%. The first notable fall occurred in August 2015, when the index dropped by 5.9%. It took more than 210 trading days, or almost nine months, to recover from this decline.
During the COVID-19 pandemic in March 2020, the Nifty saw an 8.3% fall. Within the same week, there were two more significant drops of 7.6% and 5.6%. Despite these sharp declines, the index remarkably recovered from these falls in a matter of days to a few weeks. The most dramatic drop was a 13% fall, which took just nine days to bounce back.
Rapid Recovery and Domestic Money Flow
The recovery period for these sharp falls has been getting shorter over time. For instance, in May 2020, a 5.7% fall in the Nifty was recovered within just 20 days. Over the next four years, the Nifty did not experience any single-day drops of 5% or more, highlighting its stability. However, on an election result day, the index fell by 5.9% but recovered in only three days.
One major factor contributing to this quick recovery is the influx of local money into the market. Unlike ten years ago, when foreign institutional investors (FIIs) could cause significant market dips by selling off, domestic funds now play a crucial role in stabilizing the market. With a substantial amount of domestic funds flowing into equity mutual funds, fund managers are compelled to invest regardless of market conditions.
The Self-Virtuous Cycle
This continuous influx of funds has created a self-virtuous cycle. As the Nifty index rises, it attracts more investments, which in turn fuels further growth in the index. This cycle has led to a market environment where even sharp falls are quickly bought into, leading to swift recoveries. The confidence among investors is high, as they believe that any significant drop will soon be reversed.
The Current Sentiment and Future Outlook
Currently, the market sentiment is very positive, and any sharp fall in the Nifty is viewed as a buying opportunity. This is reflected in the data, where most significant falls are followed by quick recoveries. While this phase of rapid recovery might continue for a few more years, it is essential to remember that market cycles can change. There will come a time when the market might take longer to recover from sharp declines.
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