What could be the reasons?
One of the common reason is the fear of recession in the US economy. The other reason is the geopolitical tensions between Iran and Israel as well as Bangladesh crisis. But there is more reason which is the most important. It is increase of interest rates by Bank of Japan by 0.35%. The interest rates in India decided by RBI are 6.5%
For the last 20 years the bank of Japan had kept the interest rates at zero percent. Which means Japanese investors could avail cheap money from Japan and invest elsewhere wherever they found higher returns like US markets. But now the interest rates have been increased. But what happens due to this?
This decision have made Japanese Yen costlier and Yen appreciated against dollars. The investors who had borrowed money at cheap rate and invested have suddenly started selling stocks because of costlier Yen. The value of yen appreciated to 145 per dollar from 165 per dollar.
Imagine you took a loan in Yen when 1 USD = 165 Yen and invested it in the US market. Suddenly, 1 USD = 145 Yen, so now the investor has to pay 1.13 dollars for 165 yen it has borrowed. This has led investors to sell off quickly and the markets to suffer massively.
The Indian market also suffered but due to heavy selling by Foreign Institutional Investors (FIIs) as a result of the panic in Japan, the US and the situation in India’s neighbourhood.
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