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No party lasts forever. Nevertheless, Monday’s 617-point crash in the Bombay Stock Exchange’s benchmark sensitive index, its second biggest fall on a single day, came as a rude shock to investors. The Reserve Bank of India’s (RBI) move on Friday to tighten money supply was strategically timed for markets to digest the news over the weekend preceding the new fiscal, which dawned with the sombre realisation that a prolonged bull run in the market that started in 2003 was more or less over. The Sensex at the current level — below 13,000 — is way below the lifetime high — 15,000 points — that the index was eyeing only months ago.

While we may quibble about what is the fair value of the Sensex, it is quite clear that the rally over the past three or four years was fuelled by three factors: low interest rates, high economic growth resulting from the demand it fuelled, and foreign investor inflow that chased shares in the context of an emerging ‘India growth story’ that seemed to be matching Chinese levels. All that is history now because inflation got out of control, leading to the RBI squeezing money to take the wind out of the sails of the Sensex. Meanwhile, foreign portfolio investors have also had a good run, but they depend on the forecast of growth in corporate earnings, which is closely linked to interest rates. The anticipated slowdown of the economy from the 9 per cent level in the last fiscal is a spoiler in the earnings party. That means foreign portfolio money will be more cautious while courting India. Derivatives trading in futures and options, which started during this bull run, puts a fluffy layer on top of the Sensex, which can vanish as quickly as the foreign money. All told, this was a crash that smarter analysts had cautioned of time and again. However, the timing and the savage nature of a single-day fall is something few can get right. The message for small investors and mutual funds that help them is clear: keep your eyes on corporate earnings rather than ‘story value’, which is better off in Mumbai’s film industry than on Dalal Street.

Like an old Bollywood film, bull runs seem to start with sound fundamentals, turn into confusing dramas and end with a fight scene. There is still a lot of steam in the market if investors look for modest gains and dividend yields that sound better than bank deposit rates. If only they learn the limits of greed.