Domestic equities slumped on Monday and posted their biggest fall in four months as investors dumped stocks amid worries about the impact of escalating US–Iran tensions on crude oil prices and its implications for the rupee and fiscal deficit.
The killing of a top Iranian military commander in Iraq last week has raised the risk of military confrontation in West Asia. Iran on Sunday announced its decision not to comply with limits on uranium enrichment.
And US President Donald Trump responded by threatening to strike Iran disproportionately if it retaliated against any US target.
Analysts said the geopolitical tension had increased the risk of unknowns, something which is getting reckoned on in the Indian markets.
“Rising crude oil prices will worsen our trade deficit, and in a weak growth climate, higher oil prices will act as a further dampener on economic revival. If the geopolitical tensions linger, it will dampen the enthusiasm for equity investing the world over and FPI (foreign portfolio investment) flows to India will suffer,” said Saurabh Mukherjea, founder, Marcellus Investment Managers.
A $10 increase in the price of crude oil pushes up India’s monthly import bill by around $1.5 billion and the headline consumer price index rate by 0.4 percentage points. On Friday, Brent crude closed 3.5 per cent higher at $68.96 per barrel. On Monday, the rupee depreciated by 0.18 per cent, breaching the 72 mark (against the dollar) during the session. It eventually closed at 71.94.
The escalation of US-Iran tensions is casting a shadow on the positive forecasts for equities. A phase one trade deal between the US and China had given hopes for a rebound in the global economy.
“The expectation was that we are beginning the year with global growth picking up and interest rates staying lower,” said Andrew Holland, chief executive officer, Avendus Capital Public Markets Alternate Strategies. “An escalation will lead to higher oil prices, which fuels inflation and increases the fiscal deficit,” Holland said. All the sectoral indices on the BSE ended with losses. The metal sector index fell the most and ended the session at 10,285, a decline of 3 per cent.
Market players said third-quarter earnings and macroeconomic data, scheduled to be released this week, would provide a further direction to the markets.
“However, volatility on the global front, particularly any further escalation of the US-Iran issue, could keep investors on edge. We would advise investors to avoid risky trades, as volatility is likely to remain high,” Ajit Mishra, vice-president, research, Religare Broking.