Mumbai: Indian markets started the year on a weak note, with the benchmark Sensex index losing close to 800 points in a single day, as fears over escalating US-Iran tensions drove up oil prices and curbed risk appetite. The 30-scrip Sensex ended at 40,676.63 on Monday, down 787.98 points or 1.90%, while the 50-stock Nifty closed at 11,993.05, down 233.60 points or 1.91%. For both indices, this is the biggest single-day fall since 3 September in percentage terms and since 8 July 2019 in terms of absolute points.

The National Stock Exchange’s India VIX index, which tracks investors’ perceptions of volatility for at least a month ahead, soared 16.40% to 14.78, the highest level since 6 February 2018. So far this year, VIX has risen 26.66% after falling 27.08% in 2019. A higher level for the index indicates that investors expect market indices to fall further over the next month.

Indian markets remained under pressure, following cues from global markets, said Prasanna Pathak, fund manager at Taurus Mutual Fund. “If Brent Crude sustains above $70 per barrel, fiscal deficit concerns will again arise. The government could get restricted in its spending, which could limit economic growth in the medium term, while the Reserve Bank of India (RBI) would be constrained in cutting interest rates."

(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

Brent Crude hit a seven-month high of $70 a barrel on Monday, as the US state department said there was “heightened risk" of missile attacks near military bases and energy facilities in Saudi Arabia. Following the killing of General Qasem Soleimani, Iran said on Sunday it no longer considered itself bound by the 2015 nuclear deal negotiated with the US and other world powers.

Brent Crude prices surged 22.68% in 2019 and are up 5.47% so far this year. Gold and crude oil prices continue to trend higher, hitting multi-month highs, amid increased geopolitical tensions in West Asia, said Ravindra Rao, vice president and head of commodity research at Kotak Securities. “The major focus will continue to be on developments related to geopolitical tensions in the Middle East (West Asia) and their impact on global sentiments. Escalating tensions may dent market risk appetite and weigh down on riskier assets such as global equity markets and commodities like base metals. However, it may continue to lend support to safe- haven assets like gold and silver, and will also be supportive of crude oil prices amid worries over supply disruption from the region."

As equity assets started slipping, investors fled to gold, seen as a safe-haven asset, which rose 1.6% on Monday.

VIX index soars 16.4% to 14.78, the highest since 6 Feb 2018
VIX index soars 16.4% to 14.78, the highest since 6 Feb 2018

After its last rate-setting meeting, RBI’s monetary policy committee had said that crude prices were expected to remain range-bound, barring any supply disruption due to geopolitical tensions. “Taking into consideration these factors, the CPI inflation projection is revised upwards to 5.1-4.7% for the second half of 2019-20 and 4.0-3.8% for first half of 2020-21, with risks broadly balanced," said the minutes of the MPC meeting.

The rupee hit a near two-month low against the US dollar on Monday, reacting to the crude surge. A rise in crude prices could widen India’s current account deficit at a time when government finances are already strained. The rupee closed at 71.94 to a dollar, down 0.2% from Friday’s close of 71.81. The yield on the 10-year government bond was at 6.571%, from its previous close of 6.515%.

Rahul Gupta, head of research, currency, at Emkay Global Financial Services said: “We expect the spot rupee to rally towards 72.25 and 72.50, only to fall to 71.50. As we proceed towards month-end, we can expect dollar flows related to SBI Card IPO, keeping a check on the fall in rupee."

Ravindra Sonavane contributed to this story.

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