Who Sets the Price of Indian Shares?

On 5 August 2024, the Sensex fell 2.7% in one day. Such a move is usually caused by bad news in India, such as a change in interest rates or weak quarterly results. India had neither. The causes sat abroad. Five days earlier, the nine-member board of the Bank of Japan had raised interest rates. Two days after that, a weak US jobs report led investors to expect the Federal Reserve to cut its rates. 

The decisions  forced foreign funds to sell shares across Asia. Tokyo's own market fell 12.4% on the same day. South Korea fell 8.8% and Taiwan fell 8.4%, about three times as far as India. Part of this gap comes from who was buying in India.

The yen carry trade

Japan has kept interest rates near zero since 1999. Between 2016 and March 2024, the Bank of Japan went further and applied a minus 0.1% rate on part of bank reserves. For 25 years, global investors borrowed yen at low cost and invested in assets with higher expected returns.

This strategy is the yen carry trade. The Bank for International Settlements estimated the trade to be at least  250 billion dollars in 2024 by one measure.

For example, take a fund with a ¥100 loan at near 0% and an asset providing 7% a year. The yen rose by 14%. The fund now owes 14% more in dollar terms. The 14%  return it would have generated two years after investment is gone in a flash. The fund is forced to sell assets to repay the loan before the yen rises any  further.

 When did the carry trade break? 

On 31 July 2024, the Bank of Japan raised the policy rate to 0.25%. Two days later, a weak US jobs report raised fears of a recession and of rate cuts by the Federal Reserve. The gap between Japanese and US interest rates looked set to narrow. A smaller gap makes the carry trade less profitable. Funds closed their positions by buying back yen, and the buying pushed the yen up. 

In less than a month, the yen rose around 14% against the dollar, raising repayment costs for funds with short-yen positions. These funds cut their carry-trade exposure. They sold shares and currencies across the world to raise yen, and prices fell in every market they left. The turmoil peaked on 5 August, when the Nikkei 225 fell 12.4%, the index's largest one-day fall since 1987. 

The India transmission

On 5 August, foreign portfolio investors (FPIs) sold Indian equities worth ₹10,074 crore. India was part of the global sell-off because Indian shares are liquid. As in a crisis, funds sell the market easiest to sell.  This led to The Sensex falling by 2,223 points. 

The selling hit the rupee too. Foreign funds leaving India converted  their rupees into dollars, and the rupee fell to a then-record low near ₹83.84 per dollar.

Why India fell less?

The price of a share is set by the last investor needed to complete the trades on offer. Economists call this the marginal investor. When sellers rush to exit, the price falls until the marginal investor agrees to buy, so the size of a fall depends on who this investor is and their investment.

For years, foreign funds played this role in the Indian share market, exerting great pressure on prices. In March 2020, during the Covid crash, they sold ₹61,973 crore in one month. The Sensex fell 23%. Domestic demand at pre crash prices were not sufficient enough leading to the market clearing at a much lower price.

Households changed this over the next four years. Monthly SIP contributions grew more than sixfold between 2016-17 and 2024-25, and reached ₹23,332 crore in July 2024.  Such funding is consistent every month and much more inelastic to Japanese interest rates as compared to liquidity from the Yen carry trade.

By June 2024, foreign portfolio investors’ share of NSE-listed companies had fallen to 17.38%, a 12-year low, while Indian mutual funds’ share reached a record 9.17%. At the time,  Foreign ownership remained substantially higher in South Korea at  30% of  equity market capitalization and Taiwan, where foreigners held 45.41% of Taiwan Stock Exchange market capitalization.

On 5th August , foreign funds in India  sold ₹10,074 crore, and domestic institutional investors bought ₹9,156 crore on the same day. They took about 90% of the foreign sales at prices 2.7% lower. On that day, domestic funds were the marginal buyer of Indian shares.

The days after 5 August  showed recovery.  When the pressure on the funds eased, prices recovered. The easing came fast. The Nikkei rose 10.2% on 6 August. A day later, the Bank of Japan's deputy governor said the bank would not raise rates while markets were unstable, and the yen weakened. With fewer forced sellers, Indian shares rose. The Sensex crossed 85,000 for the first time in September 2024, seven weeks after the fall. 

The larger idea

A country is always exposed to the shocks of whoever funds its markets. Foreign money once set Indian prices, so decisions in Tokyo or Washington drove the market. Indian savings now take a larger role.

The shift carries two risks. The first is price. SIP money is invested every month whatever shares cost, so prices can rise above what earnings justify and fall harder when the inflows slow. The second is investor confidence or lack thereof.  In March 2025, after five months of falling prices, investors stopped 128 SIPs for every 100 they started. Hypothetically, in a bear market lasting years, the buyers India relied on in August 2024 would leave, and foreign funds would set Indian prices again. 

Furthermore, a part of India's smaller fall came from what the index contains. Chipmakers dominate both Korean and Taiwan   markets, and investors were selling technology shares worldwide in the same week. TSMC and Samsung Electronics, the largest companies in each index, both fell about 10% on 5 August.   While the Sensex is led by banks, an energy group and IT service firms insulating it from tech pressure. 

India has traded one dependence for another. Indian share prices depend less on a board meeting in Tokyo and more on the confidence of millions of small investors. India's stability will therefore rest on whether households and retail investors  have enough incentives to continue buying into the Indian story.

References

1. Bank of Japan, "What is the Policy Board of the Bank?"

2. Business Standard, "Bank of Japan ends its negative interest rate policy, first hike in 17 yrs", 19 March 2024

3. Bank for International Settlements, Bulletin No 90, "The market turbulence and carry trade unwind of August 2024"

4. AP via ABC News, "Japan's central bank raises its benchmark rate to 0.25%", 31 July 2024

5. Business Standard, "US unemployment rate hits 4.3% in July as job growth slows considerably", 2 August 2024

6. AP via Udayavani, "Japan's Nikkei 225 stock index sinks 12.4% as investors dump a wide range of shares", 5 August 2024

7. Wall Street Journal via To Vima, "Japan's Nikkei Posts Biggest Single-Day Fall Since 1987 After Weak U.S. Data"

8. Business Standard, "Stock Market Highlights, Aug 5: Sensex tanks 2,223 points"

9. Business Standard, "Rupee worst Asian currency in U-turn as yuan carry trades unwind", 5 August 2024

10. Legal Parivar, "DIIs net buyers of Rs 9,156 crore, FIIs net sellers of Rs 10,074 crore"

11. Gulf News, "Sensex closes 2.74% down, hits lowest level in 8 months"

12. Business Standard, "Covid-19: FPIs pull out record Rs 1.1 trn in March, highest withdrawal ever"

13. Outlook, "Indian markets shed over 23% as FPIs pull out over $8 billion in March"

14. AMFI Monthly Note, July 2024

15. Business Standard, "Japanese markets recover sharply, Nikkei rebounds 10.23%", 6 August 2024

16. Sharecast, "BoJ's Uchida says rates won't rise when markets unstable", 7 August 2024

17. Business Today, "Sensex crosses 85K mark for first time, Nifty hits record high", 24 September 2024

18. Reserve Bank of India, "Developments in India's Balance of Payments during the Third Quarter of 2025-26"

19. Angel One, "SIP inflows hit record ₹32,297 crore in August, contributing accounts cross 10 crore"