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Indian stocks plunged on Wednesday while oil and commodity prices surged to multi-year highs, as the war in Ukraine and sanctions on Russia continued to whiplash markets.

The Nifty and the Sensex, taking cues from global indices, fell 1.12% and 1.38%, respectively.

Volatile phase
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Volatile phase

Crude oil continued to soar. The price of the May contract of Brent crude on the Intercontinental Exchange (ICE) stood at $113 at 7.30pm, according to Bloomberg data. This is the highest level of Brent crude oil prices since 2014. The West Texas Intermediate (WTI) also surpassed the $110-per-barrel-mark. Its April futures contract on NYMEX was 7.90% higher at $111.31 per barrel, the highest level since 2013.

The surge in oil prices came despite the decision of the International Energy Agency (IEA) member countries to release 60 million barrels of oil from their emergency reserves. The US also announced tapping its strategic petroleum reserve.

This is adding to substantial concerns about inflation in India even as the December quarter economic growth slowed to a lower-than-expected 5.4%. “This slowdown is likely to be extended. As things stand now, India’s GDP growth for FY23 will be lower and inflation higher than estimates," said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services. This is negative for the stock market.

Among base metals, aluminium, copper, zinc, and lead prices have risen 3.6-15% during the last month on the London Metal Exchange, with aluminium leading the pack. Notably, aluminium prices, having gained more than 58% in the last year, are at multi-year highs.

Analysts said that international sanctions on major metals producers in Russia could squeeze the tight aluminium market further. The supply of aluminium already remained impacted due to higher energy costs leading to the shutdown of many smelters. China also saw smelter closures following power shortages and its initiatives to curtail carbon emissions.

“A conflict escalation may see base metal prices climb higher short-term, and prices of nickel and aluminium are climbing already," said analysts at Credit Suisse in their report dated 28 February. The immediate concern would be that any cut in Russian exports would cause shortages, they added. However, they said that if commodity exports are unaffected, then prices should subsequently slide as the greater risk would be to demand through a potential recession.

Shares of Hindalco Industries Ltd, National Aluminium Co. Ltd (Nalco), Vedanta Ltd, scaled fresh 52-week highs on Wednesday, having gained 73-112% in the past year.

The Russian invasion of Ukraine can also mean higher steel prices in Europe due to supply disruption. Analysts at Nomura Research said that “the most impacted region is Western Europe, which accounted for 21% of its imports from these countries in CY21. Economic sanctions on Russia could impact supplies into Europe, potentially leading to higher pricing in the region, in their view".

This, however, may offer an opportunity for Indian manufacturers to ramp up exports to Europe. New opportunities may open up in Asia as well.

Analysts at Edelweiss Securities Ltd said that “in the case of domestic players, we see a positive impact as Russia has emerged as the regional steel price setter in South-East Asia". If Russian exports are curtailed, coupled with the ongoing maintenance activities at Far East mills and China focusing on reducing steel exports, we may see Indian steel mills such as JSW Steel and Tata Steel gaining in the export market", they added.

The rising input costs still pose some challenges as key raw materials such as iron-ore and coal prices are on the rise. The weaker domestic demand is keeping a tab on domestic steel prices.

Metal stocks were the top gainers among sectors, followed by energy and media. However, the rest of the sectors ended the day in the red.

“Volatility is expected to remain high in the near term given elevated Russia-Ukraine conflict, upcoming state election results as well as US Fed meeting," said Siddhartha Khemka, head retail research, Motilal Oswal Financial Services Ltd. If the conflict stretches on and keeps energy prices elevated for long, it may impact margins and earnings, he added.

The government has been monitoring the geopolitical situation closely and also its economic fallout. On Wednesday, Prime Minister Narendra Modi held a high-level meeting with minister for external affairs S. Jaishankar, minister for commerce and industry Piyush Goyal, national security advisory Ajit Doval, foreign secretary Harsh Vardhan Shringla and principal secretary to the prime minister P.K. Mishra to discuss the evolving situation.

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