Context: Recently sensex recorded a biggest fall of 13.2% in a single day amid growing concerns over the COVID-19. One school of thought that has emerged over the last few days has suggested the stock market should be shut down to prevent a further fall.
Arguments with respect to closing of stock markets
Arguments in favour
1.Enforced Lockdown due to COVID-19: With a lockdown currently enforced in Mumbai, employees of stock exchanges (BSE and NSE), along with employees that support the functioning of the stock exchanges, are finding it difficult to reach their workplaces.
2.To stop further falling of the indices: Many investors feel that if stock markets are shut down, investors will stop selling, share prices will stop falling and, in the process, the indices, which represent the overall state of the market, will also stop falling.
1.Possibility of en masse sale: Stock markets do not wait for things to happen. They discount possibilities in advance. If it has been decided to shut down there will be an en masse sale in stock exchanges.
2.Overall trust of investors in the functioning of stock markets needs to be maintained: People and institutions invest in stocks because of their liquidity.Liquidity needs to be maintained to earn the trust of investors.
3.Need consistent logic even in case of rise of stock markets: If the stock markets are not shut down when they are going up to levels not justified by company earnings, they should not be shut down when they are falling.
Earlier instances of steep falls in sensex
- Aftermath of the Harshad Mehta scam,1992: The biggest fall of Sensex before current fall was 12.8?ter the Harshad Mehta scam.
- 2004: The Sensex fell 11.1?ter the Sonia Gandhi-led United Progressive Alliance registered a surprise win in the Lok Sabha elections.
- 2008 Financial crisis: The Sensex had fallen 11%.