News

Published: September 21, 2023
Updated: September 21, 2023

Stock Market Stumbles as Crude Oil Nears $100 - Investors Brace for Impact

Indian benchmark indices witnessed a notable single-day decline, the most significant in two months, as they slumped by over 1%. This decline was driven by substantial selling, particularly in HDFC Bank and other leading index components. Additionally, global market uncertainties loomed large, fueled by the approaching $100 per barrel mark in crude oil prices, adding to investor caution ahead of the US Federal Reserve's policy meeting.

Market Turbulence:

The Sensex, a crucial market indicator, concluded the day down by 1.2%, closing at 66,800.84 points. In a similar vein, the Nifty mirrored this sentiment, posting a comparable drop to settle at 19,901.4 points.

Crude Oil Influence:

Crude oil's surge, with Brent crude nearing the $96 per barrel threshold, has seen an astonishing 33% rise over the past three months. This increase was driven by production cuts among oil-producing nations in the OPEC+ coalition. The mounting oil prices are raising concerns that the US Federal Reserve may be compelled to raise interest rates later in the year. This potential shift could render equities, particularly in emerging markets like India, less attractive.

Market Outlook:

Investors are eyeing the Federal Reserve's stance, anticipating a potentially hawkish tone. Additionally, the escalating US bond yields are making emerging market stocks, including those in India, appear less appealing as an asset class.

Current Account Deficit Concerns:

Rising oil prices, coupled with a 10-month high in the goods trade deficit for August, have ignited concerns regarding the widening of the current account deficit (CAD). An expanding CAD could exert pressure on the Indian rupee and deter foreign investors from engaging in Indian markets.

Foreign Investors and Rupee Performance:

Foreign portfolio investors were net sellers of ₹3,110.69 crore worth of stocks in Indian markets on the same day. Domestic institutional investors also engaged in profit booking, selling stocks valued at ₹573.02 crore. The rupee, which had touched a record low of 83.26 against the dollar, rebounded to 83.07, possibly due to Reserve Bank of India intervention.

Market Valuations and Correction:

Market analysts point to the high valuations of Indian stocks as contributing to investor unease. Presently, the Sensex and Nifty are trading at over 18.5 times expected earnings for the next twelve months.

Major Contributors to Sell-Off:

HDFC Bank led the sell-off, experiencing a 3.87% decline. Concerns arose after its management indicated expectations of worsening net interest margins, net worth, and asset quality post-merger with parent company Housing Development Finance Corp. This ripple effect led to selling pressure in banking and finance stocks, with the Bank Nifty falling by 1.3%. Reliance Industries Ltd (RIL) also faced a decline of over 2%, hitting a two-month low. This was attributed to a block deal involving 0.3% of its equity base and negative sentiment linked to rising oil prices.

Broader Market and Volatility:

While the midcap index remained relatively unchanged, the smallcap index witnessed a nearly 1% decline. The India VIX, an indicator of expected stock market volatility, increased by 2.69% to reach 11.13.

Risk Management and Market Perspective:

Market experts recommend a focus on risk management during these turbulent times. Traders are advised to consider adding short positions as a hedge to existing long positions. In this scenario, the Nifty's decline is viewed as a "normal retracement" so far, with expectations that the 19,600-19,750 zone could provide support if the decline continues.

The stock market's significant downturn, driven by surging crude oil prices and concerns over the Federal Reserve's stance, underscores the fragility of global markets. While Indian indices grapple with this turbulence, investors and traders are urged to adopt prudent risk management strategies to navigate these uncertain conditions.