Introduction: The Stock Market’s “Emergency Brake”
Imagine driving a car downhill when suddenly, the brakes fail. Scary, right?
Now, picture the stock market crashing too fast, too hard—investors panic, prices collapse uncontrollably, and chaos erupts.
To prevent this, Indian exchanges (NSE/BSE) use circuit breakers—a built-in “emergency brake” for the market.
But how do they work? When are they triggered? Let’s break it down.
What Are Circuit Breakers?
Circuit breakers are automatic trading halts triggered when stock indices (Sensex/Nifty) fall or rise too sharply in a single day.
Key Features:
✔ Pause trading temporarily (15 mins to full-day halt).
✔ Apply to indices (Nifty 50, Sensex), not individual stocks.
✔ Designed to prevent panic selling or irrational rallies.
How Do Circuit Breakers Work in India?
India uses a three-stage circuit breaker system based on percentage drops in the Nifty or Sensex.
| Stage | Index Fall | Trading Halt Duration |
|---|---|---|
| 1 | 10% | 45 minutes (if before 1 PM) |
| 2 | 15% | 1 hour 45 minutes (if before 1 PM) |
| 3 | 20% | Market shuts for the day |
Example:
- If Nifty crashes 10% at 11 AM → Trading pauses for 45 minutes.
- If it falls another 5% (total 15%) → Halts for 1 hour 45 minutes.
- If it drops 20% anytime → Market closes early.
Why Are Circuit Breakers Needed?
- Prevent Panic Selling → Gives investors time to rethink decisions.
- Avoid Market Manipulation → Stops artificial crashes/pumps.
- Protect Retail Investors → Prevents massive losses in minutes.
Real-Life Example:
- March 2020 (COVID Crash):
- Sensex fell 13% in a day → Circuit breaker triggered (halted for 45 mins).
- Without it, the crash could have been worse.
Circuit Breakers vs. Stock-Specific Price Bands
| Feature | Circuit Breakers | Price Bands |
|---|---|---|
| Applies to | Entire market (Nifty/Sensex) | Individual stocks |
| Purpose | Stop extreme market crashes/rallies | Limit daily stock price movement |
| Example | Nifty falls 10% → Trading halts | Stock hits upper/lower circuit → No trading beyond limit |
Key Difference:
- Circuit breakers pause the whole market.
- Price bands (like 5%, 10%, 20%) restrict single stocks.
What Happens When a Circuit Breaker Triggers?
- Trading stops (no buying/selling allowed).
- Investors get time to assess the situation.
- After the halt, trading resumes normally.
Impact on Traders:
✔ Intraday traders → Can’t exit positions during halt.
✔ Long-term investors → No need to panic (just a cooling-off period).
Have Circuit Breakers Ever Been Triggered in India?
✅ Yes! Notable instances:
- 2008 (Global Financial Crisis) – Multiple halts.
- 2020 (COVID Crash) – 10% drop triggered a halt.
- 2022 (Russia-Ukraine War) – High volatility, but no full halt.
Final Takeaways
✔ Circuit breakers = Emergency pauses for extreme market moves.
✔ Triggered at 10%, 15%, and 20% drops in Nifty/Sensex.
✔ Protect investors from panic-driven crashes.
✔ Different from stock-specific price bands.
