Fresh fears over oil prices are back to haunt Dalal Street.
Benchmark indices fell sharply in early trade on Monday after renewed military action between the US and Iran sparked concerns that crude oil prices could climb further if the conflict intensifies.
Since India imports nearly 85% of its crude oil, any sustained rise in oil prices threatens inflation, corporate profits and economic growth, prompting investors to turn cautious.
The BSE Sensex was down 626.40 points, or 0.81%, at 76,942.99, while the NSE Nifty50 slipped 184 points, or 0.76%, to 24,022.90.
WHY DALAL STREET IS WORRIED ABOUT CRUDE
The latest trigger came after Iran said it had once again closed the Strait of Hormuz following fresh missile and drone attacks involving US forces over the weekend.
The Strait of Hormuz is one of the world’s most important oil shipping routes. Any disruption raises fears of supply shortages, pushing global crude prices higher.
Those fears were immediately reflected in the oil market. Brent crude jumped more than 4% to $79.12 a barrel, while WTI crude rose over 4% to $74.33. Although prices remain below the $90 mark, investors fear the conflict could escalate further and send oil sharply higher in the coming days.
WHY HIGHER OIL PRICES HURT INDIA
Higher crude prices are a major concern for India because the country relies heavily on imported oil.
A sustained increase in crude prices can inflate the country’s import bill, push up fuel and transportation costs, increase inflation and squeeze company margins. It can also limit the RBI’s room to support growth through lower interest rates.
These concerns triggered broad-based selling across sectors on Monday. Financials, metals, auto and private banks were among the biggest losers, while India VIX, the market’s fear gauge, surged more than 10%, signalling higher investor anxiety.
WHAT COULD DECIDE THE NEXT MOVE?
According to Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, the direction of crude oil prices will determine whether the current weakness deepens.
“The back and forth movement in the West Asia crisis has become the new normal. The attempt by Iran to weaponise geography has negative implications for energy importers like India. And, President Trump’s totally inconsistent stand vis-a-vis Iran has rendered stability a thing of the past. We don’t know how this crisis will pan out.”
He believes Brent crude is the most important indicator investors should watch.
“From the market perspective, particularly for India, price of crude is the crucial factor. There is no panic in the oil market like in March. Brent is currently trading around $79. So long as Brent trades below $90, the market won’t be impacted significantly. But if Brent shoots up above $90, there can be a significant correction in the market.”
Despite the near-term uncertainty, Vijayakumar noted that foreign institutional investors (FIIs) continue to support Indian equities.
“A positive factor that is imparting resilience to the market now is the FII inflows. During the last eight trading days, FIIs were buyers in five days. The weakness in the chip trade in South Korea is turning out to be positive for India. FIIs are reducing the concentration risk in chip stocks and moving money to stabler markets like India. If this trend sustains, the Indian market will continue to remain resilient.”
