Indian stock markets are living through a week defined by a single number: the price of crude oil. With Brent crude holding above 114 dollars a barrel, close to a six-month high, and geopolitical tensions in West Asia showing no sign of easing, the benchmark Sensex and Nifty have swung between sharp falls and tentative rebounds, leaving investors cautious and foreign funds in selling mode.
The pattern of the last few sessions tells the story of a market caught between strong domestic fundamentals and a global energy shock it cannot control.
The latest jump in oil prices disturbed Indian equities at the start of the week, with both major indices beginning Monday with losses and 12 of India's 16 sectors booking declines, according to a Reuters report cited by OilPrice.com. The Sensex fell 0.46 per cent and the Nifty 50 fell 0.5 per cent in that early trade, with information technology stocks shedding 1.1 per cent.
The trigger was concern over supply disruptions as tensions in West Asia escalated, pushing Brent crude, the global benchmark, above 114 dollars a barrel.
By the close of trading on Monday, however, the picture had changed. Indian equity benchmarks rebounded late in the session after what market watchers described as an attritional morning trade, recovering from initial losses as investors picked up beaten-down stocks after four consecutive sessions of declines. The BSE Sensex rose 482.92 points, or 0.66 per cent, to close at 73,606.75, while the NSE Nifty advanced 153.20 points, or 0.68 per cent, to settle at 22,753.20.
The recovery was driven by buying at lower levels after the recent sell-off, and it brought some relief after a difficult week in which the Nifty had fallen 2.4 per cent and the Sensex 2.2 per cent.
The relief proved short-lived. In early trade on Tuesday, the benchmarks fell again amid persistently elevated crude oil prices and selling in information technology stocks. The 30-share BSE Sensex declined 281.95 points to 73,316.21, while the 50-share NSE Nifty fell 63.15 points to 22,694.60.
Among the Sensex constituents, Infosys, Hindustan Unilever, Tata Consultancy Services, Asian Paints, HCL Tech and Tech Mahindra were among the major laggards, while Bharat Electronics, Eternal, Maruti and InterGlobe Aviation were among the winners. Brent crude traded 0.74 per cent lower at 115 dollars a barrel in that session, still far above the levels at which Indian markets are comfortable.
The reason oil matters so much to India is straightforward. India is the world's third-largest importer of crude, and it depends heavily on imports to meet its energy needs. When crude prices rise sharply, the effects travel through the economy along several channels at once.
The import bill swells, putting pressure on the trade deficit and the rupee. Higher fuel and transport costs feed into inflation, which squeezes household budgets and limits the room for interest rate cuts. Government finances feel the strain through fuel subsidies and the cost of managing the fiscal deficit.
And corporate earnings suffer, particularly for companies that consume energy or depend on consumer demand, which is why sectors such as information technology, paints and consumer goods have been among the hardest hit in the current sell-off.
Market experts have been clear about the mechanics of the current pressure. G Chokkalingam, founder and head of research at Equinomic Research, told Reuters that concerns over supply disruptions due to escalating tensions in West Asia had pushed crude oil prices higher, and warned that domestic equities are likely to remain highly volatile with a short-term downward bias.
Unless the West Asian conflict is resolved meaningfully, he said, higher energy costs could reignite global inflation, restrain economic growth and darken the outlook for stock markets worldwide.
V K Vijayakumar, chief investment strategist at Geojit Investments, pointed to two near-term headwinds: Brent crude remaining above 114 dollars and the United States 10-year bond yield hovering around 4.97 per cent. In that setting, he said, foreign institutional investors will remain in risk-off mode. The data bears that out.
Foreign investors offloaded equities worth 1,462.49 crore rupees on Monday alone, taking their October outflows to 4.75 billion dollars. Domestic institutional investors, by contrast, bought equities worth 2,609.57 crore rupees on Monday, a sign that domestic money continues to support the market even as foreign money leaves.
Yet Vijayakumar also noted the supports that keep the market from falling further: improving corporate fundamentals, as reflected in second-quarter earnings, and robust domestic fund inflows. That tension between foreign selling and domestic buying is one of the defining features of the current market, and it explains why the indices have been able to rebound from their lows even as the news flow remains negative.
On Monday, the buying extended beyond frontline stocks, with the Nifty Midcap 150 index gaining 1.07 per cent and the Nifty Smallcap 250 index rising 1.13 per cent. Metals, pharmaceuticals, healthcare and oil and gas stocks advanced, while media and consumer durables remained under pressure. The India VIX, a gauge of market volatility, rose 1.73 per cent, indicating continued caution among investors despite the recovery.
The oil story itself has a distinctly Indian dimension. Despite continued disruptions, India's imports of Middle Eastern crude climbed to 2.8 million barrels per day in September, lifting the region's share of total imports to 54 per cent, up from 32 per cent in August.
That increase was driven by Indian refiners buying a growing number of spot cargoes as Gulf producers moved increasingly higher crude volumes through the Strait of Hormuz via ship-to-ship transfers in the Gulf of Oman.
Russia remained the single largest crude oil supplier to India in September, but imports of Russian oil fell by 14 per cent from August to 1.8 million barrels per day, and the share of Russian oil in India's oil imports dropped to 33.5 per cent from 46.6 per cent in August. The shifting pattern of India's crude sourcing is itself a consequence of the geopolitical churn, as refiners adapt to sanctions, shipping risks and price signals.
The immediate backdrop to the high prices is the escalation of tensions in West Asia, including attacks on Saudi Arabia that have kept global oil supply worries in focus. Brent crude futures traded around 114.5 dollars a barrel, easing from a near six-month high of 117 dollars, but the market remains on edge. West Texas Intermediate crude, the American benchmark, has been trading near 101 dollars a barrel.
For India, which imports the overwhelming majority of the crude it consumes, there is little shelter from a global price spike of this kind, and the pass-through to domestic inflation is a matter of time rather than doubt.
Investors are also watching a second set of triggers this week. The United States Federal Reserve's policy meeting on October 27 and 28 will be closely read for signals on the future path of interest rates, and any shift in the Fed's outlook could move United States Treasury yields and the dollar, with implications for capital flows into emerging-market equities such as India's.
Major American technology earnings are also due, and they will shape sentiment towards the information technology sector, which has already been under pressure in India. Ponmudi R, chief executive of Enrich Money, said investor sentiment is likely to remain cautious ahead of the Fed's decision, and Deepesh Sarawagi, technical research analyst at Choice Broking, noted that crude prices near 115 dollars and the Fed meeting could drive volatility through the week.
Ajit Mishra, senior vice-president for research at Religare Broking, cautioned that Monday's rebound remained tentative, with elevated crude prices, geopolitical uncertainty and concerns over the global interest-rate outlook continuing to weigh on sentiment. That word, tentative, captures the mood of the market well.
The indices can bounce when stocks become cheap enough to attract value buyers, but the bounce has not yet turned into a trend, because the cause of the selling, the price of oil, has not gone away.
For ordinary investors, the lesson of the week is about the connection between distant geopolitics and the value of a portfolio at home. A conflict in West Asia moves the price of a barrel of oil, which moves the price of petrol and diesel, which moves inflation, interest rates and company profits, which in turn moves the Sensex and the Nifty.
That chain is why a market that is fundamentally supported by strong domestic earnings and steady domestic inflows can still fall sharply on a bad day for crude. Until oil prices retreat or the geopolitical picture clears, Indian markets are likely to remain volatile, with each session's direction set as much in the oil market as on Dalal Street.
(Reporting based on OilPrice.com, The Economic Times, The Times of India, Mid-Day, Rediff and The New Indian Express.)