India's Biggest Stock Market Booms And Busts

'Every period of excessive optimism eventually gives way to a correction, while periods of extreme pessimism often create the best investment opportunities.'

Booms and busts are intrinsic to stock markets.

Since the 1991 reforms, India's equity market has shown how money and narratives fuel surges before excesses, leverage and misplaced faith trigger collapses.

Investors cannot avoid these cycles. They must endure them. A review of market cycles from the early 1990s to 2026 can, however, help investors build a more resilient investment approach.

Harshad Mehta Boom And Bust

The Boom

One genuine and one artificial factor propelled the Harshad Mehta bull run. "The real factor was the 1991 backdrop, with the Licence Raj being dismantled. Indian companies suddenly had a future worth pricing," says Dhirendra Kumar, founder, Value Research.

The artificial factor was the source of the money. Harshad Mehta pulled funds from the interbank securities market.

"Liquidity from banking circles was the single-most important factor behind the rise in equity market values during this bull run," says Sanjay Sinha, founder, Citrus Advisors, and former CEO, L&T Mutual Fund.

The Sensex rose from about 1,000 to nearly 4,500 in 15 months. The ACC stock, favoured by Mehta and his associates, climbed from about Rs 200 to Rs 9,000.

Mehta used the replacement-cost theory to justify elevated valuations. It valued a share in accordance with what it would cost to recreate the company.

"The replacement-cost theory basically gave investors permission to stop doing the valuation arithmetic," says Kumar.

The Bust

On April 23, 1992, a newspaper reported that the State Bank of India could not account for around Rs 500 crore. The shortfall was traced to Mehta.

"Once the diversion was discovered, the mechanism through which liquidity was being drawn from the banking system and pumped into the equity market ended," says Sinha.

The Sensex halved by August after the money flow stopped.

The Dotcom Boom And Bust

The Boom

Belief in the Internet's potential drove the dotcom boom. The thesis was right, but investors paid excessively high prices for tech stocks. That ultimately proved to be their undoing.

During the boom, the market split between information technology (IT) and information communication and entertainment (ICE) stocks and the rest. Investors chased ICE stocks. Infosys traded at over 100 times earnings.

"Textile companies added 'infotech' to their names and saw their prices double," says Kumar.

IT-focused mutual funds generated phenomenal returns. "Strong returns created a virtuous cycle that attracted more retail investors into those schemes. The money raised by them was funnelled back into IT stocks," says Sinha.

Ketan Parekh ramped up the so-called 'K-10 stocks'. This time the boom was funded by cooperative banks.

"Madhavpura was the most infamous cooperative bank in this episode," says Kumar. Badla magnified the impact of borrowed money, while herd mentality strengthened the rally, according to Sinha.

The Bust

The Nasdaq reversed course in March 2000. The Indian bust began in March 2001.

The trigger was a payment crisis. "It involved defaults by brokers in Calcutta. The collapse of Madhavpura Mercantile Co-operative Bank, the discovery of Ketan Parekh's scam, and his subsequent arrest ended the party," says Kumar.

Stocks of companies like Infosys and Wipro continued to grow over the next 20 years, but their shares fell by 70 to 80 per cent during the downturn. The technology thesis was right; the price investors had paid for tech stocks was wrong.

Key takeaways: Both episodes relied on narratives that displaced valuation discipline. "In the Harshad Mehta episode, it was the replacement-cost theory. In the dotcom episode, it was eyeballs over earnings," says Kumar.

Both booms drew on bank money deployed by people who did not own it.

"If the source of money driving a boom cannot be explained, it is probably coming from somewhere it should not," says Kumar.

Leverage magnifies gains and losses. "An investor using his own money can sit through even a 30 per cent decline, but a leveraged position gets sold out at the wrong moment," says Kumar.

Many retail investors entered without understanding company and sector fundamentals. "Word of mouth dominated financial analysis," says Sinha.

The 2003-2007 Boom And 2008 Crash

The Boom

Indian equities remained flat from 1994 to 2003, apart from a two-year IT rally. Most sectors delivered no returns because the Asian crisis, high interest rates and other factors hurt them.

"Valuations of most sectors were at attractive levels after 10 years of price consolidation. This created an extremely favourable base," says Sailesh Raj Bhan, president and chief investment officer, equity investments, Nippon India Mutual Fund.

Private investment in power rose, the global commodity price boom increased profits, and the domestic investment cycle recovered from a low base.

"A combination of attractive valuations in 2004 and the investment cycle boom, supported by the global commodity cycle, led to sharply higher equity returns during this period," says Bhan.

The Bust

Global markets rallied from 2005 to 2007, lifting valuations. The subprime mortgage crisis in the United States then triggered the global financial crisis.

"Indiscriminate subprime lending fuelled leverage, which got bundled and passed on as high-grade credit. This was the primary reason for the bust that brought down several reputed financial institutions," says Bhan.

Key takeaways: Investors should ask whether normal growth assumptions justify a stock's price. "The best risk reduction measures are buying quality businesses and not overpaying for growth," says Bhan.

The 2013-2017 Boom And 2018 Bust

The Rally

Better macroeconomic conditions, political stability and confidence drove the rally. The 10-year bond yield fell from close to 9 per cent at the end of 2013 to around 6 per cent by mid-2016. Crude oil declined from over $110 per barrel to nearly $35-40.

"This helped improve India's current account position, inflation outlook and fiscal flexibility," says Vinit Sambre, head of equities, DSP Mutual Fund.

The 2014 general election strengthened sentiment. "It created expectations of policy stability, reforms, governance improvement and a revival in the investment cycle," says Sambre.

Mutual fund flows and retail participation increased. Midcap and smallcap stocks in particular benefited.

"Investors started extrapolating stronger future growth, which led to meaningful valuation re-rating across several businesses," says Sambre.

The Bust

This happened primarily due to earnings failing to justify valuations. "Many companies had run up sharply on narratives, but profit growth did not justify the valuation expansion," says Sambre.

Demonetisation and goods and services tax (GST) disrupted parts of the informal economy and the consumption chain.

Global liquidity tightened as the US Federal Reserve (Fed) raised rates, crude oil prices rose, and the rupee weakened.

The Infrastructure Leasing & Financial Services (IL&FS) crisis exposed leverage and liquidity risks, especially in non-banking financial companies.

"In several smallcap and midcap names, poor governance, pledged shares and aggressive balance sheets became visible only after liquidity reversed," says Sambre.

Key Takeaways

All types of stocks run up during a liquidity-fuelled rally. During a downturn, however, the market quickly separates quality from hope.

"Avoid companies with high leverage, weak cash flows, poor governance or excessive promoter pledging," says Sambre. Even good businesses can disappoint when bought at extreme valuations.

"The best approach is to participate in growth, but with risk controls, position sizing and a clear focus on fundamentals," says Sambre.

He adds that only earnings, cash flows and balance-sheet strength can sustain valuations.

The Post-Covid Boom And 2025-2026 Correction

The Rally

Global liquidity, near-zero interest rates, fiscal stimulus, recovering corporate earnings and digital adoption drove the post-Covid boom.

"Domestic investors embraced equities through systematic investment plans (SIPs) and direct investing. As economic activity normalised, optimism around India's growth prospects fuelled a broad-based market rally," says Radhika Gupta, managing director and CEO, Edelweiss Mutual Fund.

The Downturn

Slower earnings growth and foreign institutional investor (FII) outflows triggered the 2025-2026 correction.

"The artificial intelligence trade and higher global interest rates made some emerging markets less attractive. Markets that had priced in strong growth faced a derating when growth expectations moderated and liquidity conditions tightened," says Gupta.

Key Takeaways

Strong domestic participation made this correction more orderly than earlier foreign investor-dominated cycles.

"Leverage was relatively contained. Domestic inflows acted as shock absorbers, preventing panic selling and limiting the magnitude and duration of market declines," says Gupta.

Retail investors continued their SIPs and adhered to their asset allocation. "This contrasts with earlier cycles when they often exited during downturns, locking in losses and missing eventual recoveries," says Gupta.

She adds that resilient inflows pointed towards growing investor maturity.

Lessons For Retail Investors

Time in the market trumps market timing. Experts say investors can create wealth through sensible decisions applied consistently over long periods.

"Markets will always move through phases of optimism, correction and recovery. Investors who accept this reality are far more likely to succeed than those trying to time every turning point," says S Naren, executive director and chief investment officer, ICICI Prudential Asset Management Company.

Investors must respect cycles.

"Every period of excessive optimism eventually gives way to a correction, while periods of extreme pessimism often create the best investment opportunities. Avoid extrapolating recent returns indefinitely into the future," says Naren.

Equities, gold, real estate and fixed income move through different cycles. "Diversification across asset classes helps investors participate in long-term wealth creation while reducing the impact of being wrong about any one cycle," says Naren.

Even great businesses can trade far above their fundamentals. "Paying any price for a good story has historically not been a successful investment strategy," says Naren.

Feature Presentation: Aslam Hunani/Rediff