The Indian stock markets witnessed a sharp 3% dive on Monday after the US government on Sunday warned that Russia could create a surprise pretext for an imminent invasion of Ukraine, sending global stock markets in a tizzy and spiking crude prices.
Russia has more than 100,000 troops massed near Ukraine, which is not part of the Atlantic military alliance, and Washington - while keeping open the diplomatic channels that have so far failed to ease the crisis - has repeatedly said an invasion is imminent, Reuters reported. Moscow denies any such plans and has accused the West of "hysteria", it added.
The Sensex closed 1,747.08 points or 3% down at 56,405.84 after Monday’s trading session, while the Nifty closed 16,842.8, down 531.95 points or 3.06%.
This is the worst single day fall in the benchmark indices since April 2021 and wiped out investor wealth worth Rs8.47 trillion.
Rising geopolitical tensions between Ukraine and Russia, persistent inflation worries due to rising crude prices and a fast-approaching rate hike by the US Fed have created strong headwinds for equity markets globally.
Foreign institutional investors continue to be big sellers of Indian equities, adding to the pressure on markets. So far in February, FIIs have net sold Indian equities worth Rs7,692 crore, while domestic institutions have net bought equities worth Rs5,837.25 crore. Brent crude price hit a peak of $96.16, the highest since October 2014, due to the Ukraine crisis. India VIX, which measures investors' perception of market volatility, surged 23% higher on Monday.
“Geo-political tension and the rising crude prices are weighing on investors' sentiments leading to a sharp rise in volatility…Last week, US bond yields hit 2% in response to the strong payroll data and the multi-decade high inflation, indicating the possibility of further rate hike projection by the US FED. All the macro-economic developments are leading to volatility in major assets classes including equity, debt, and currency. We expect this increased volatility to hit small / midcaps more than large caps,” said Naveen Kulkarni, chief investment officer, Axis Securities.
Other markets too fell under the weight of the worsening geopolitical situation.
Japan’s Nikkei was down 2.33%, Taiwan closed 1.71% lower and Hong Kong was down by 1.41%
“Global stocks slid Monday and commodities including crude oil surged as geopolitical risks over Ukraine rippled through global markets. European shares slipped to their lowest level in 20 days on Monday, with travel, banking and auto stocks leading the slump as investors fretted over geopolitical risks following warnings that Russia could invade Ukraine at any time,” said Deepak Jasani, head of retail research, HDFC Securities.
Investors are worried that the geopolitical tensions could lead to further spike in crude prices and further worsening the inflation numbers in major economies.
“Oil prices can shoot up further if ongoing tussle between Russia-Ukraine escalates or due to any retaliatory sanctions by the US. India will be adversely impacted if crude goes any higher, as India will see higher pressure on its BOP, as well as it will import higher inflation. Market is also anxious that with rising inflation (on crude strengthening), the Fed may act faster than expected on tapering as well as rate hike,” said Aishvarya Dadheech, Fund Manager, Ambit Asset Management.
Crude demand is projected to grow to an all time high in 2022 and thus experts cautioned that any supply side disruption due to the Ukraine issue could lead to further spike in oil prices.
“On a weekly chart, it’s been a 8th consecutive week where price has moved higher. The International Energy Agency raised its 2022 demand forecast and expects global demand to expand by 3.2 million barrels per day (bpd) this year, reaching an all-time record 100.6 million bpd. Also, price has inclined to 7-year high level as escalating fears of an invasion of Ukraine by Russia, a top energy producer, added to concerns over tight global crude supplies,” said Gaurav Garg, head of research, Capitalvia Global Research Ltd.
On the domestic front, weak IIP numbers that came out on Friday also contributed to weak investor sentiment. India reported a IIP growth of 0.4%, in December 2021, a 10 month low.
“Apart from the unfavourable base, lack of traction in domestic demand is the main reason for the sharp slowdown in industrial production. There are reasons to suggest that rural demand is particularly weak. The contraction in staples production seems to corroborate this. While growth in primary & intermediate goods and infrastructure seems to suggest a modest revival in investment demand, capital goods continues to do poorly,” brokerage Anand Rathi said in a note on Monday.
The government on Monday reported that the Wholesale Price Index (WPI) eased marginally to 12.96% in January against 13.56% in December 2021.
