A dummy's guide to the stock market crash

Monday saw a big fall in the rupee as massive sell-offs, pushed the Indian rupee to a 23-month low of Rs.66.79 to a dollar during intra-day trade on the foreign exchange markets.

"Rupee is following the equities fall. The sell-off in the global equities has impacted the rupee badly. If the sell-off continues, we might see rupee plunging further," said Hiren Sharma, senior vice president, currency advisory at Anand Rathi Financial Services.

Throughout the world, markets in Athens, Spain, US, Australia and Tokyo crashed as they plummeted and sank to new lows. 

Why are the markets crashing?

The major catalyst for the rupee and other currencies' fall has been the devaluation of yuan. 

China is the world's second largest economy after the United States but it is also an economy in deep trouble.

China's central bank devalued yuan by two percent on August 11. This was the biggest devaluation of the Chinese currency since 1994.

The currency fell again by another two percent on August 12 sending the world economy into panic. 

The measure to devalue the yuan is also seen as an attempt to arrest the implosion in the Chinese markets-- whose benchmark index fell by over 8 percent on Monday, prompting fears of another round of yuan devaluation.

Under ordinary circumstances, a falling stock market does not trigger panic, as stocks are risky investments.

People are also on a selling spree because the move also came as a bit of a surprise, as it follows a long period of strengthening of the currency. 

The People’s Bank of China had kept the yuan strong to shift the economy from being export-driven to increasing domestic demand. 

However, Beijing soon realized that the country would fall short of its goal for economic growth in 2015, and the abrupt devaluation followed.

Another main concern this time, is how widespread margin trading has become in China. Margin trading allows you to buy more stock than one would be able to normally afford, as you borrow money from a broker to purchase stock.

A few years ago, China relaxed a rule that limited margin trading to wealthy people. Reports say that this resulted in 20 million people opening stock market accounts and once the stock market started to fall, their losses worsened and loans increased.

The world markets are fearful of the fact that the $10 trillion dollar Chinese economy has the ability to dump unlimited goods and services, thereby cornering the entire international exports customers base.

"The next move in the rupee will depend on the global situation and the Reserve Bank of India (RBI). A major part of the global cues will emanate out of China, as the Chinese government will take steps to arrest the fall in their markets," Anindya Banerjee, senior manager for currency derivatives with Kotak Securities, told IANS.

What is China doing?

The Chinese government is now trying to bring its stocks back up. Firstly, it has announced it would once again reduce the amount of money required to open a margin-trading account. 

According to a Vox report, 21 major Chinese brokerages have also made a coordinated announcement, pledging to purchase $120 billion yuan worth of Chinese stocks to help stabilize the market a little.

The Chinese police have also launched a nationwide campaign against underground banks to maintain order in the financial and capital market.

Meng Qingfeng, vice minister of the public security, urged the police to fully understand the harm of underground banks to the national economic security and the order of the financial market.

He also said that the campaign would stop transfers of illicit money through offshore companies and underground banks while adding that they had uncovered several major cases involving more than $67.2 billion.

Ultimately, China wants a stronger currency and is determined to stay on course for a 7% growth this year.

With inputs from IANS