Nifty cracks 30% but history could still favour a bounce

The Nifty is already down over 31% in the last 45 trading sessions so it is well and truly into bear territory. Let us look back at how the Nifty reacted in the past after a 30% correction.

Mar 19, 2020 08:03 IST India Infoline News Service

The debate is no longer whether we are in bear market territory.  Any correction of 20% from the peak closing levels is considered to be a bear market. The Nifty is already down over 31% in the last 45 trading sessions so it is well and truly into bear territory.

Data Source: NSE

Whether this market correction will deepen or not is hard to say but corrections of 30% plus are nothing uncommon. In fact, the last 25 years have seen 6 occasions (before the 2020 correction) when the Nifty corrected by more than 30% and the timelines have varied in each case. Let us look back at how the Nifty reacted in the past after a 30% correction.

1996 correction – MAT wipes out the profits
Fall Starts Nifty Start Nifty Ends Duration Points Fall Correction (%)
17 Jun 1996 1203 775 170 Days 427 (-36%)

The fall was triggered by the formation of an unstable coalition government followed by a disastrous budget. MAT was introduced and P Chidambaram allowed non-voting shares. That put off the foreign investors who dumped frontline Indian stocks. However, this did not last long and within 8 months, the Nifty had recovered the level it had started off giving a solid return of 68% in just 8 months.

1998 correction – Nuclear testing isolates India
Fall Starts Nifty Start Nifty Ends Duration Points Fall Correction (%)
22 Apr 1998 1247 800 222 Days 447 (-36%)

The market peaked out after Atal Behari Vajpayee formed a rather shaky coalition government. But, the real momentum for the fall came from the nuclear testing at Pokhran in May 1998. It led to economic sanctions and isolation leading to a sharp correction in the Indian markets. However, by late 1999, the technology boom had resulted in the Nifty getting closer to 1800; a return of over 100% from the lows in just one year.

2000 correction – It was a global technology meltdown
Fall Starts Nifty Start Nifty Ends Duration Points Fall Correction (%)
23 Feb 2000 1818 849 576 Days 968 (-53%)

The market peaked after technology stocks started imploding in the US. That led to the Ketan Parekh circular trading scam getting exposed. Most technology stocks corrected more than 90%, including the blue chips of the day. The index overall lost 53% and only bottomed after 18 months post the 9/11 attacks. This was a prolonged and full-fledged bear market and it took almost 3 years for the market to regain and break the old highs.

2004 correction – Markets panic as NDA loses power
Fall Starts Nifty Start Nifty Ends Duration Points Fall Correction (%)
09 Jan 2004 2015 1292 129 Days 722 (-36%)


The markets had started facing pressure around January 2004 after there was a lot of speculation in PSU stocks and in stock futures. But the real hit came on May 17, 2004 when the Nifty hit the 20% lower circuit for the first time. Most of the damage happened on vote counting day as the NDA government fell and the Congress formed the government with the support of the Left Parties. However, Chidambaram was back as FM, reforms were on track and Nifty was back to where it started by the end of 2004.

2006 correction – India sneezes as US Fed hints at rate hikes
Fall Starts Nifty Start Nifty Ends Duration Points Fall Correction (%)
11 May 2006 3774 2595 34 Days 1179 (-31%)

There was panic in the markets after the US Fed hinted that it could start hiking rates to control the froth in the markets. On the second anniversary of the 2004 crash (17 May 2006), the markets once again hit lower circuit. But what happened in the next one month was an absolute rabid correction of 34%. This remains the most violent correction in such a short time as overleveraged F&O positions got unwound. By mid 2007 (exactly in one year), the Nifty had doubled from the lows.

2008 correction – Sub-Prime halts the longest bull rally
Fall Starts Nifty Start Nifty Ends Duration Points Fall Correction (%)
20 Jan 2008 6357 2253 293 Days 4104 (-65%)

This remains the longest and also the deepest bear markets. Most US and European banks were on the brink and only a massive liquidity stimulus could retrieve the situation. Actually, this bear market lasted till 2014. There was a bounce back in 2010 but the European crisis took markets lower. It was only in 2014 that the peak of 2008 was decisively broken.

What does the 2020 correction suggest?
This correction has perhaps been next in intensity to the 2006 crash in terms of the sharpness of correction in a short span of time. In the last 25 years, only 2000 and 2008 have been prolonged and deep bear markets. In all the other cases, the bounce has been equally sharp. How the 2020 correction pans out, will largely depend on how the pandemic and the growth impact are handled.

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