Circuit Breaker in Stock Market

For the first time since 2008, the circuit breaker was triggered and the trading was halted for 45 minutes in the Bombay Stock Exchange.

Circuit Breaker

The index based market-wide circuit breaker system was introduced by the SEBI (Securities and Exchange Board of India) in 2001. It is a mechanism used to prevent the markets from crashing due to panic selling. The current panic selling was triggered by the fears about the effect of the COVID-19 pandemic on the economy.

Application

The circuit breakers brings about a coordinated halt in the trade of equities and equity derivative markets. The system is applied differently at 3 stages of the index movement:

  • When the index falls >10% before 1PM: trading is halted for 45 minutes.
  • When index falls >15% on or after 2PM: trading is halted for remainder of the day.
  • When index falls >20% at any time of the day: trading is halted for remainder of the day.

Reasons for fall in Stock Market

Some of the reasons for the current fall in the stock market are:

  • The COVID-19 outbreak has affected consumer behaviour.
  • Various sectors are taking a hit from the closing of borders: hospitality, tourism, airlines, etc.
  • There is a fear that the COVID-19 pandemic would lead to a recession. Hence investor sentiments have been affected.
  • Investors are cutting back on riskier investments.
  • Foreign institutional investors have sold stocks worth about 25,000 crore INR in March (sustained selling).
  • 50% drop in crude oil prices.

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