Investors pulled out of equity markets on worries that the spike in oil prices and fall in the rupee would adversely impact the economy. Investor sentiment has already been fragile following defaults by Infrastructure Leasing & Financial Services (IL&FS), a lender to the infrastructure sector. The benchmark Sensex closed at 35,975.63, down 551 points, or 1.51 per cent, the most since March 16. The Nifty declined 150 points, or 1.36 per cent, to end at 10,858, a level last seen on July 9.
Brent crude prices were hovering above $85 a barrel — the most since November 2014 — on fears that the impending sanctions on Iran’s petroleum industry would lead to constricted supplies. Oil prices have gained 22 per cent since mid-August and are up more than 50 per cent in the past one year. The surge has come at a time when the dollar is gaining against most global currencies amid the US Federal Reserve embarking on monetary tightening.
The rupee closed at its all-time low of 73.34 a dollar, down from its previous close of 72.91. The Indian currency has fallen more than 12 per cent so far this year and is the worst performing in Asia. The central bank's intervention remained limited and in a notification after market closing, it allowed oil marketing companies to raise dollars abroad without a need for hedging.
According to experts, high oil prices coupled with a weak rupee will make a serious impact on India’s economic performance. Oil above $80 a barrel, they say, will disrupt the trade balance, increase the risk of fiscal slippage, and pose an upside risk to inflation. The yield on the 10-year government security rose 12 basis points to 8.11 per cent on Wednesday.
Previously, it was in 2014 when the bond yield had traded decisively above the 8 per cent level. “The markets are under relentless pressure on the back of crude oil touching multi-year highs and the rupee making fresh all-time lows. The precarious positioning of international macros simply not letting the pressure off the market,” said Jagannadham Thunuguntla, head of research, Centrum Wealth.
Overseas investors sold shares worth Rs 15 billion, while their domestic counterparts provided buying support to the tune of Rs 14 billion on Wednesday. During an earlier session, foreign portfolio investors (FPIs) had pulled out Rs 18 billion, while domestic investors had provided strong counter-buying, helping the markets stabilise. After the latest sell-off, FPI selling from the equity markets has crossed $2 billion.
Overseas investors have pulled out another $7.1 billion from the debt markets. The combined FPI sell-off of over $9 billion is the worst-ever for a calendar year for the Indian markets. These outflows have come on the back of rising US bond yields and the dollar. During the better part of the decade, most emerging markets have been huge beneficiaries of foreign capital, thanks to ultra-low interest rates in the bond yield. With the US Federal Reserve embarking on a rate hike path to control inflation, the money that had found its way into EMs is getting repatriated. The yield on the 10-year US Treasury note has shot up to 3.07 per cent, increasing nearly 30 basis points in the past one month. The level of more than 3 per cent is seen as negative for EM flows.
Among the biggest losers on Wednesday were Mahindra & Mahindra (down 6.7 per cent) and Tata Consultancy Services (4.1 per cent). Private sector lenders Axis Bank and ICICI Bank fell more than 3 per cent each.