Markets and rupee crash as crude sizzles at $139

Domestic financial markets on Monday went into a turmoil with the stock markets plunging 2.74 per cent and the rupee falling to a record level of 77.01 against the dollar as the price of Brent crude oil rocketed to $139.1 per barrel, its highest level since 2008, before falling to $125.5 per barrel. The rupee’s previous all-time low was 76.91 to a dollar in April 2020.

The Sensex, which crashed 1,791 points (3.29 per cent) at one stage, lost 1,491 points at 52,842.75, and the NSE Nifty Index crashed 382 points to 15,863.15 on sustained selling led by foreign investors. The rupee hit a record low of 77.01 in early trade itself and closed with a loss of 76 paise at 76.93 as the surge in oil prices threatened to push up imported inflation and widen the country’s trade and current account deficits.

Markets were unnerved over the possibility of disruptions in international oil supplies and potential sanctions on Russian oil and gas exports. The price of crude oil has risen by nearly 30 per cent from $97.5 on February 23 prior to Russia’s announcement of a “special operation” in Ukraine. Concerns over potential delays in the process of Iranian crude oil returning to global markets have also contributed to the uptick in prices.

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Analysts said the outlook remains weak for the rupee till the time crude price stays above $105. If the crude prices start crossing $130, the rupee can even touch $78.50 very quickly, said Jateen Trivedi, senior research analyst at LKP Securities. Rising crude oil prices would expand the current account deficit, in turn putting further pressure on the domestic currency. As crude oil import accounts for nearly 20 per cent of the country’s import bill, a rise in prices could lead to surge in inflation and force RBI to go for liquidity tightening measures followed by rate hikes. An increase of $10/barrel in crude oil prices could roughly raise inflation by 10 basis points.

With foreign portfolio investors (FPIs) pulling out from Indian markets, the small-cap index dived by 2.30 per cent and mid-cap index by 2.25 per cent. Realty, bank, finance, auto and capital goods indices fell up to 2.7 per cent. HUL shares fell 3.80 per cent, RIL 3.67 per cent and HDFC 4.47 per cent. FPIs sold stocks worth Rs 7,499 crore, taking the total withdrawals to Rs 26,000 crore in March. “Today’s fall is due to news that the US can ban crude supply from Russia. It is not a time for new investment until this war situation is settled, but long-term investors need not worry about it. As Warren Buffett once said, that he will not sell equity in case of war even if the conflict escalated into World War III,” said Ravi Singhal, vice chairman, GCL Securities.

As investors started flocking to gold, MCX gold gained nearly 2 per cent, and globally it crossed $2,000/oz in Monday’s trade. Gold is a safe haven for investors historically and attracts funds in times of uncertainty. The yield on 10-year benchmark bond rose 6.89 per cent, putting upward pressure on short-term interest rates.

On the other hand, the risk of retail inflation rising and leading to stagflation has increased. “New sanctions against Russia have triggered huge jumps in gold and crude prices. In this scenario, when the economies are already struggling to keep the pace of recovery, fears of stagflation have also started to creep in, with concerns over high commodity prices impacting inflation and slowing growth. All these factors are impacting the markets worldwide and investment outflows,” said Ravi Singh, head of research, ShareIndia.

The sharp uptick in prices comes as Indian consumers have been enjoying a four- month reprieve from rising petroleum product prices with oil marketing companies (OMCs) having kept the price of petrol and diesel constant since early November. With elections in Uttar Pradesh, Punjab, Uttarakhand, Manipur and Goa coming to a close, consumers are expected to see a consistent increase in fuel prices starting this week as OMCs look to bring prices in line with international benchmarks and recoup losses. The prices of petrol and diesel have to be hiked by about 52 paise for every dollar increase in the price of crude oil for OMC marketing margins to remain constant. The price of crude oil has risen by about $45 per barrel since the price of petrol and diesel was last revised in November.

Petrol is currently retailing at Rs 95.41 per litre in the national capital while diesel is retailing at Rs 86.67 per litre.

Analysts said investors should stay invested if they have long-term investment plan and mutual fund investors should continue their SIP (systematic investment plan) without breaking the investment. On the other hand, the big correction will give an opportunity to investors to pick up good quality stocks at attractive levels. “Investors should wait and watch the unfolding situation before taking any major commitments. Buying should be confined to stocks/ segments which are fairly valued or have good earnings visibility,” V K Vijayakumar, chief investment strategist, Geojit Financial, said.

It is advisable for all investors to follow a wait and watch strategy and avoid any fresh entry at the current juncture, said an analyst. If the Ukraine crisis escalates, the market is likely to take further beating as oil prices are expected to remain at an elevated level. While the US Federal Reserve is also meeting next month to take a decision on hiking interest rates and tightening liquidity, there are expectations that the Fed may not go in for a steep hike or tightening. Another worry is the impact of rising crude oil prices on the Indian economy at a time when inflation is at the six per cent level, above the RBI’s upper tolerance band.

The US is currently in the process of trying to revive the 2015 nuclear deal with Iran through which the latter had agreed to limit its nuclear programme in exchange for relaxations in economic sanctions that restrict Iranian oil exports. The process to restore Iranian crude oil supplies to the global markets, however, could take several months.

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