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MUMBAI : Indian shares tumbled on Friday as Russian shelling of Ukraine caused a fire at Europe’s largest nuclear power plant, roiling markets worldwide.

The twin benchmark indices extended their losses, with the Nifty and Sensex shedding 1.53% and 1.4%, respectively. Other major Asian markets, including Nikkei, Taiwan, Shanghai Composite and Hang Seng closed 0.96-2.5% lower.

Value Erosion
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Value Erosion

Concerns about elevated oil prices also kept investors nervous. Crude oil continued to trade near its recent highs, with the benchmark Brent having touched $120 a barrel recently. Rising crude prices are also putting pressure on the rupee, as India imports more than 80% of its oil requirements.

“Crude is the major headwind for the rupee, stock market and the economy now. Depreciating currency leads to imported inflation, forcing the RBI to abandon the accommodative monetary stance. The consequent higher interest rates will adversely impact economic growth," said V.K. Vijaykumar, chief investment strategist at Geojit Financial Services.

The rupee extended losses, depreciating by 0.34% to 76.17 a dollar.

“We expect the rupee to see further depreciation towards 76.44 levels if the (currency) pair sustains above 76.10. Levels around 75.50 are major support," according to the currency desk of Emkay Global Financial Services Ltd.

The Russia-Ukraine conflict is hurting the rupee, bonds, and equities via the three channels of oil prices, the dollar index, and global equity prices, said Anindya Banerjee, deputy vice-president, currency derivatives and interest rate derivatives at Kotak Securities Ltd. Brent crude touched a high of around $120 this week to the highest level since 2012. “Oil prices are showing signs of fatigue and have pulled back from $120. If oil continues to fall, it will be positive for the rupee, but barring a fall below $100, any pullback can be seen as consolidation within the large uptrend," Banerjee added.

Foreign institutional investors (FIIs) remained net sellers, though domestic institutional investors (DIIs) continued to support the markets.

FIIs have sold 84,250.82 crore worth of stocks till 3 March, while DIIs purchased 71,873.41 crore worth of equities. The provisional figures on the BSE for 4 March indicated FIIs sales at 7,631.02 crore worth of equities while DIIs bought 4,739.99 crore.

“Domestic institutions have grabbed 50% of FII sales in cash markets. Reflecting domestic institutions’ strong commitment and positive outlook on India," said Shrikant Chouhan, head of equity research (retail), Kotak Securities Ltd.

However, analysts said that volatility is likely to stay high because of heightened geopolitical risks. The upcoming state elections results, the US Federal Open Market Committee meeting and accelerating inflation will keep investors on the edge.

Rising inflation is a key concern. Analysts said that with commodity prices on the rise, corporates heavily dependent on them as raw materials would have to battle rising prices and a falling currency, impacting their operating parameters.

“Business confidence across manufacturers and service providers still remain subdued led by the continued rise in inflationary pressures," according to Acuité Ratings & Research Ltd, While the rating agency believes the growth outlook for India may not have a high linkage with the emerging geopolitical risks, increasing sanctions on Russia can disrupt global commodity markets and supply chains of some products, thereby having an indirect impact on the supply side and aggravating inflationary pressures.

Though the near-term concerns remain elevated and volatility is expected to continue, the steep corrections have made Nifty valuations attractive.

“Post the recent correction, the Nifty is trading at 19X 12-months forward price to earnings, which is lower than its 10-year average for the first time since November 2020," said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services Ltd. Despite the challenges, earnings remain resilient, with December quarter Nifty earnings growing at 25% and forward estimates staying stable, Khemka said. That will act as a cushion in an otherwise fragile external situation, and the recent correction has led to moderation.

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