Indian equity markets, yet again, were halted for 45 minutes on Monday with benchmark S&P BSE Sensex hitting 10 per cent lower circuit level.
Sensex lost 3,219.78 points touching sub-26,696.18-levels, while the Nifty50 index crashed 940.60 points to 7,804.85.
Global markets have been on a roller coaster ride ever since the outbreak of Covid-19 pandemic. The uncertainty is enforcing automatic circuit breakers often, however, countries are standing by to keep financial markets open.
Here are three reasons why markets can't be shut.
One, a market lockdown leads to panic as traders won't have access to their assets. To put it in banking parlance, it amounts to a run on the bank mentality and prices will be in a free fall whenever indices open for trade later.
So instead of restoring calm, a freeze leads to further market irrationality. We saw this happen just last week, when the Philippines market plunged a massive 25 per cent after a day of the forced shutdown.
Two, it leads to systemic risks and effects liquidity. Governments have to guarantee the value of frozen assets to avoid margin calls, while the order of what to unwind first whether derivates, pledged shares etc could lead to a complex and chaotic arrangement and in the process potentially undermine the value of equities and even government bonds.
Three, it implies the country's inherent weakness. Despite the endless global market rout, no country has drawn out the curtains yet.
"That gives a wrong impression. No country is doing it. Even in 1929 (global depression), markets were running. It's the nature of the beast and their wild fluctuations are symptoms of the crisis, not the cause. It's not that in the next 15 days the virus-affected cases will surely come down and markets will recover. We don't know that yet, so closing markets isn't the answer," said Prasanna Tantri, of ISB.
There were only a few precedents when markets were closed such as after 9/11, or during WW1 when the NYSE was closed for four months. But Sensex and Nifty remained open even in the event of Mumbai terror attacks and the 2008 global financial crisis.
With 75 districts under lockdown, market participants favoured the lockdown view to be extended for benchmark indices, but on Sunday, Sebi indicated that freezing markets wasn't the answer and maintained that for exchanges, it'll be business as usual.
However, to abnormally high volatility, last week, Sebi halved position limits for certain stock futures, restricted short-selling of index derivatives and raised margin rates for some shares.
Exchanges including NSE, BSE and MCX also allowed brokers to trade from home to ensure business continuity.
