Sensex falls most in six weeks on surging oil prices
Mumbai: A sell-off spurred by rising crude oil prices caused the biggest single-day percentage fall in the BSE Sensex since 27 September on Tuesday.
The rupee fell the most in seven weeks, and government bond yields surged, as investors fretted that expensive oil may led to a fiscal slippage, increase inflationary pressures and lower the chances of the Reserve Bank of India (RBI) cutting interest rates in its December monetary policy review. Bond prices and yields move in opposite directions.
The Sensex closed down 360.43 points, or 1.07%, to 33,370.76. The National Stock Exchange’s Nifty too closed 101.65 points, or 0.97%, down at 10,350.15. Markets across the globe were strong with Japan’s Nikkei Index jumping to a 26 year-high.
Rising crude prices are one of the main reasons for the market correction, said Arun Thukral, managing director and chief executive officer, Axis Securities Ltd.
Brent crude touched a 28-month high of $ 64.10 per barrel on an anti-corruption purge by Saudi Arabia’s crown prince. Shares of few oil marketing companies (OMCs) and aviation firms reacted negatively.
“The markets cracked largely due to rising crude oil prices, disappointing September earnings from a few companies and weakness in pharma stocks. Rupee has also started to weaken which may have impacted markets. The markets were in overbought zone and (investors) were looking for a reason to sell off,” said Deepak Jasani, head of retail research at HDFC Securities Ltd.
Though the government’s push on infrastructure and recapitalization plans saw a positive response from foreign institutional investors (FIIs), who resumed buying in Indian markets last month, a higher crude oil price leading to weak macros may hurt sentiment, analysts said.
In this year so far, FIIs have bought Indian shares worth $6,385.07 million. They have bought $583.03 million of Indian equities in November. Domestic institutional investors (DIIs), meanwhile, have sold Indian equities worth Rs1,354.86 crore this month after buying Rs72,093.85 crore in 2017. Lower earnings estimate amid higher valuations are other near-term overhangs for the markets.
Bloomberg data shows that Sensex firms’ consensus earnings per share (EPS) forecast for the current financial year has been cut by 10.96% since April and by 4.2% for the next year.
Due to the increase in oil prices, the yield on the benchmark 10-year bond surged to a fresh six-month high, while the rupee dropped most in nearly seven weeks. The 10-year bond yield closed at 6.927%, a level last seen on 11 May, compared to its previous close of 6.858%.
The domestic currency weakened past the 65-mark against the US dollar. The rupee fell 0.55%, its steepest fall since 21 September, to close at 65.03 a dollar.
“India needs to keep a cautious eye on the surge in global crude prices as every $1 per barrel rise in crude prices leads to its import bill rising by $1.33 billion. Also, a rising import bill can put downward pressure on the rupee. India’s import bill rises by $1.03 billion for every one rupee weakening vis-a-vis US dollar,” said Ajay Bodke, chief executive officer & chief portfolio manager, portfolio management services at Prabhudas Lilladher. “In a fiscally constrained environment, a weakening rupee can also lead to higher fiscal deficit if the government decides not to allow oil marketing companies to hike petrol and diesel prices for consumers and decides to absorb the increased fuel import bill,” Bodke added
The fall in rupee, however, led to a rally in technology stocks as the BSE IT index bucked the trend rising 2% today.
A cheaper rupee translates into better export earnings. The index was at a 15-month high on valuation comfort, said analysts.
“Valuations of the IT sector are comfortable given that most of the companies generate significantly high free cash flows. This provides a downside support. For a sustainable improvement from hereon, the trajectory of revenue growth will have to start showing improvement,” said Shibani Kurian, senior vice-president and head of equity research at Kotak Asset Management Co. Ltd.
The BSE Healthcare index closed 3.5% lower, dragged down by Lupin Ltd (down 16.84%) after it received a warning letter from the US Food and Drug Administration (USFDA) pertaining to two manufacturing facilities located in Goa and Indore.
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