The Indian markets took a breather after a strong bull run as oil prices reached their highest since July 2015 as Saudi Arabian Crown Prince Mohammed bin Salman's purge led to arrests of royals, ministers, and investors, including prominent billionaire investor Alwaleed bin Talal.
Crude oil, however, settled slightly lower on Wednesday after US government data showed rising domestic crude production, a surprise build in US stockpiles and a decline in monthly Chinese crude imports.
However, analysts will still watch-out the prices amid escalating tensions between OPEC members Saudi Arabia and Iran, which they said did more to rattle the market than the prince's purge.
Along with crude prices hitting a two and a half year-high, few of the factors that might drag market sentiment even further are the fiscal deficit standing at 91.3 per cent, the risk of fiscal slippages, coupled with a low likelihood for a Reserve Bank of India (RBI) rate cut, and the US Federal Reserve definitely hiking rates in December.
Analysts feel that these factors might lead to a dip in the markets but the indices will not see a mega correction in the short term. As long as there are no major negative events globally and at the domestic level, they expect the markets to remain buoyant.
"We might see a correction in the beginning of next year before the Budget but, in the short-term, the markets will remain range-bound," said AK Prabhakar, head of research at IDBI Capital.
However, there are concerns. Fuel prices may rise further despite crude steadying a bit. The price of Brent crude has gone up by 36 per cent since then. Subsequently, fuel prices in India have also risen.
According to Prabhakar, "Indian markets are in a tight spot but it doesn't mean that we will correct. There will be a pressure and markets might see a knee-jerk reaction but this bull-run will continue. Even when crude oil prices were at $140-$150/barrel, the bull market was at the peak. Now, we are hardly near $70/barrel. We don't need to worry too much at these levels."
"Now, the share of alternative energy is also on the rise, so one should not be too worried about it. But yes, it is a concern. Low oil prices were a benefit India had and the government used it to the fullest. Now, we might see some inflationary pressure due to the rise in prices," he added.
Brent crude oil prices reached their highest since July 2015 after Saudi Crown Prince Mohammed bin Salman's purge.
Analysts feel that the crown prince's crackdown is largely a move to consolidate power before he assumes the throne later this year or next. It is nevertheless a shocking move by the Saudi royal, and one that will have big repercussions for the country's oil industry.
Meanwhile, in India, the rise in oil prices might have some inflationary pressure, suggesting that the RBI may not cut rates in its December policy.
However, analysts say that the markets do not see a rate cut happening in the December meet and have already priced that in.
Ankur Varman, AVP (institutional equity sales) at Emkay Global Financial Services, said, "I do not think the RBI will cut rates in December. But, as far as the markets are concerned, the inflows are very strong and also this rally is not India-centric. It is a global rally. All the equity markets have been rising in sync. Barring a shallow correction, there has to be a major global event for a major one (correction). A domestic rate hike will not see a correction that big."
He added that there may be a 2-3 per cent dip; but for a rally this big, it would not really matter.
With fiscal deficit at 91.3 per cent and the bank recapitalisation plan getting implemented, it seems that the government might not be able to meet the current year's fiscal deficit target of 3.2 per cent of gross domestic product.
The government, recently, had to cut expenditure, including on the much-needed capital front, in September for a second month in a row, to control its fiscal deficit.
The squeeze on capital expenditure (capex) was so much that it declined even cumulatively as a percentage of Budget expenditure in the first half of 2017-18, compared with the year-ago period.
Both Prabhakar and Varman suggest that markets have factored in a bit of slippage as the place the money is getting spent in is more important.
"Markets have already factored in a bit of fiscal slippage. Markets have been very positive about the recapitalisation and the format it has been done in. Even if the government does not meet the target and shoots past it by a little, markets won't be overtly negative on the same," Varman said.
Prabhakar said that a bit of fiscal slippage would not lead to a major correction, adding that the government would not reduce spending as it might become a problem during elections.