Soaring crude oil prices continue to dampen investor sentiment

Soaring crude oil prices continue to dampen investor sentiment. While the benchmark indices managed to eke out about 1 per cent gain on Tuesday after four days of heavy losses, surging oil prices will continue to act as strong headwinds for the market in the near term, according to analysts.

Global research and brokerage house Credit Suisse has downgraded the Indian markets to ‘underweight’ from ‘overweight’, citing oil prices. The Brent crude price had touched nearly $140 a barrel on Monday, a level last seen 14 years ago. On Tuesday, it was trading around $132 a barrel.

“We tactically cut our India position from overweight to underweight. Higher oil prices hurt the current account, add to inflationary pressures, and increase sensitivity to Fed rate hikes,” said Credit Suisse in a note. The brokerage expects markets like Malaysia to gain from the surge in commodity prices.

Analysts said oil prices would overshadow the election results of five states, due on Thursday.

The Bharatiya Janata Party (BJP) may win four out of the five states, according to exit polls. Under normal circumstances, the markets would have cheered such an outcome – with many seeing it as a precursor to the 2024 general elections.

“Macro headwinds may limit the euphoria of a BJP win for the markets,” said a note by Kotak Institutional Equities (KIE). “In our view, the increasing risks of elevated and persistent energy prices and their resulting impact on various macro parameters will remain the dominant theme in shaping the market direction in the near term.”

Not just oil, prices for several commodities have hit multi-year highs, stoking fears of stagflation.

The benchmark Sensex has dropped close to 14 per cent from its peak in October 2021. Much of the decline has come in the past two weeks after Russia attacked Ukraine. The impact of high oil prices will not reflect in this election results as the Centre has not yet revised prices of petrol and diesel. The market is keenly eyeing the government’s next move in this regard.

“The government may have to reduce excise duties of diesel and gasoline, increase minimum support prices (MSPs) sharply, and spend higher-than-allocated amounts in rural and social sector schemes, in order to provide some buffer to economically-weaker households,” said the note by KIE.