Vipul Verma
After four weeks of gains, Indian equities tumbled on all trading days last week, with the Bombay Stock Exchange’s benchmark Sensex index declining 863.05 points over the previous week. The losses were primarily triggered by global factors, such as surging crude prices, losses on US bourses and fresh concerns over domestic inflation.
US crude oil futures hit a record $126.25 (about Rs5,250) a barrel in post-settlement trading, before pulling back to $126.17. On the New York Mercantile Exchange, June crude settled at $125.96, up $2.27.
The prices almost panicked equity investors as fears of its devastating impact on global economies prompting them to book profits from the stock rally, which started from mid-March lows.
To add to it, huge losses at the world’s largest insurer, American International Group Inc., or AIG, raised doubts over the view that the credit crisis was ending. AIG wrote down assets linked to subprime mortgages and said it would need to raise $12.5 billion to boost its balance sheet. Earlier during the week, US’ largest trader of home loans, Fannie Mae, or Federal National Mortgage Association, posted big losses, which reinforced the doubts over the end of the credit crisis.
The American International Group tower in Hong Kong. The company, the world’s largest insurer, suffered huge losses in the last quarter and said it would need to raise $12.5 billion (Photo by: Scott Eells/ Bloomberg
However, crude oil is now the biggest factor, creating ripples in the economic world as the prices have risen almost $16 or 14.5% this month. Although the Indian consumer is not facing the heat due to administered prices of petroleum products at present, talks have begun over revising domestic oil prices since crude costs have soared. If that happens, it would further complicate India’s economic situation, which is struggling with high inflation.
The government has so far taken soft fiscal measures to check inflation, but the recent figures on inflation at 7.61% raised concerns, as it shows that these steps were not successful, though the rise in inflation is statistically marginal.
With the rising inflation, some hike in interest rates could be a possibility as that is the next logical step after a hike in the cash reserve ratio, or CRR, the percentage of funds commercial banks have to keep with the Reserve Bank of India. In case interest rates are hiked, stock markets may be negatively impacted, pushing them back to bearish territory.
Going forward, Indian markets will closely watch industrial output numbers for March that will be released by noon on Monday. Going by the forecast, the expansion is pegged around 6.2% year-on-year, which shows a slowdown in growth from the previous month, that could be well attributed to the tight monetary policy affecting demand.