Risk aversion continued in the financial markets as the uncertainties around geopolitical tensions aggravated.
The Sensex and Nifty declining for the fifth straight session ended the day to close lower by 0.66% and 0.67% respectively.
With Crude having hit the highest intraday levels since September 2014 the Indian stock markets, plunged sharply mirroring the weakness in global markets though also recovered significantly.
Global markets too had a torrid day, with oil prices edging close to $100 a barrel. Asian markets such as Hang Seng, Nikkei, Taiwan, Shanghai and Jakarta composite index too ended the day lower by 0.59-2.69 %.
The rising crude oil prices pose a major threat to the Indian economy and thereby are weighing on the outlook for Indian stock markets too.
“The Rising crude prices will not bode well for India, as it is a net importer of crude. This will adversely impact our balance of payments, slow down the overall growth and will be inflationary. This can dampen the equity markets in the short term” said Aishvarya Dadheech, Fund Manager at Ambit Asset Management.
The risk remains aggravated and further upside in the crude prices cannot be ruled out. If the Russia-Ukraine tensions escalate to a level where there is some kind of direct conflict, S&P Global Platts Analytics sees the potential for oil prices to go above $100/barrel levels. Paul Hickin, Director, S&P Global Platts said that “The global economy can withstand a short-lived price spike, but a spike with a higher peak and longer duration does much greater damage to global oil demand and its recovery to pre-pandemic levels”
The spiking crude prices remain the biggest macro headwind for India feel experts. The inflationary consequence of this will force the RBI to abandon its dovish monetary stance said Dr VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Since crude price rise is due to supply disruptions, owing to the Russian -Ukraine situation, in an already tight supply scenario experts feel that impact can be significant. “This will result in heightened inflationary pressure, both PPI and CPI, which when coupled with low/ slow economic growth, doesn’t essay well for the capital markets,” said Pritam Patnaik, Head - Commodity, HNI & NRI Acquisition, Axis Securities. He added that this could further force the hands of the central bankers to raise rates to control inflation, which again could impact the market.
India imports over 80% of its oil requirement and any rise in crude prices not only poses inflationary and fiscal risks to the economy but impacts the current account deficit too. Crude oil-related products have a direct share of over 9% in the WPI basket. According to Madan Sabnavis, chief economist of, Bank of Baroda, a 10% increase in crude would lead to an increase of around 0.9% in WPI inflation.
The higher crude prices could mean that the oil import bill could also swell further having an impact on India’s external position.
The situation is fluid and FIIs are likely to continue selling feel experts. The FII”s have been net sellers for Rs 53112.25 crore worth of Equities in 2022 till date though Domestic institutions have supported well with Rs 40750 crore worth of buying.
The markets are likely to remain on the edge in the near term. Amnish Aggarwal, Head of Research at Prabhudas Lilladher, said that, “ the Confluence of global headwinds and rural slowdown have stopped the one-way March of last 18 months resulting in the removal of some froth from the markets. We believe Fed rate hike, crude prices and global geopolitical risks ( Russia- Ukraine row) can result in near term volatility and correction. In addition, a slowdown in rural demand and rising inflation (led by crude and supply chain disruptions) are near term worries”
