Crude oil slump triggers a sell-off in domestic stocks, currency

Crude Oil price
The plunge in oil prices triggered a sell-off in domestic stocks and currency as it triggered fresh worries about global growth. The benchmark Sensex fell 1,011 points, or 3.2 per cent, to end at 30,637, while the Nifty50 index closed at 8,981, down 280 points, or 3 per cent.

The rupee declined 29 paise to close near its record low at 76.83 against the US dollar. Brent Crude prices, too, dropped nearly 27 per cent to below $19 per barrel after some oil contracts traded in the US slipped into negative territory.

While India tends to be a beneficiary of low oil prices, the collapse in prices triggered a global risk-off sentiment with the markets across Asia and Europe declining amid fears of a recession. Also, the concerns over the health of North Korean leader Kim Jong-un further dampened sentiment.

“The decline in crude prices is positive for the Indian economy as we import bulk of the commodity. However, the fall is not a standalone event. It is a manifestation of multiple factors, which include global demand and structural geopolitical challenges. So, while the benefits of lower crude prices are clear, there will be an impact of global demand challenges, which could outweigh the benefits of lower crude prices,” said Naveen Kulkarni, chief investment officer, Axis Securities.

On Tuesday, foreign portfolio investors (FPIs) sold shares worth nearly Rs 2,100 crore, with little support coming from domestic institutional investors, who, too, were net-sellers although marginally. Last month, FPIs had pulled out a record Rs 62,000 crore from domestic equities. In comparison, FPIs had been net-buyers on most occasions in April, thanks to the improvement in risk appetite underpinned by aggressive stimulus packages unveiled by policymakers globally and also a slow increase in the number of Covid-19 new cases in key geographies.

 

 
Thanks to abatement of FPI selling, the Indian markets had managed to rebound more than 20 per cent from their coronavirus lows on March 23.

However, the fall in oil prices raised doubts over FPI action going ahead. Some believe the plunge in oil prices could trigger a fresh round of selling by overseas investors. Many foreign funds investing in India are directly or indirectly backed by oil-rich countries.

In the past two months, the markets and the economy had charted a divergent path. Most stocks had managed to climb despite a virtual halt in the economic activities due to lockdowns announced to contain the pandemic. Market players said stocks are susceptible to correct due to earnings uncertainty. 

“Corporate earnings have been impacted by the pandemic-related shutdowns. Post earnings management guidance has also not given a clear indication about the recovery path. Earnings results will be in focus for the future course of the company business,” said Vinod Nair, head of research, Geojit Financial Services.

The market breadth, which has been resilient so far this month, showed signs of cracking. On Tuesday, the declining stocks were twice that of advancing on the BSE.

Barring three, all the Sensex components ended with losses, with banking and financial stocks witnessing deep cuts. IndusInd Bank, Bajaj Finance, ICICI Bank, and Axis Bank dropped between 8 per cent and 12 per cent. The Bank Nifty index fell 5.4 per cent. The India VIX rose 4 per cent.

From a technical point of view, the Nifty could drop to 8,800 if it fails to sustain above 8,900, said analysts.


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