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Indian stocks slumped 3% on Monday after the US on Sunday warned that Russia could invade Ukraine, sending global stock markets tumbling and crude prices higher.

Russia has amassed more than 100,000 troops near Ukraine, which is not part of the North Atlantic military alliance, and Washington, while keeping open the diplomatic channels that have so far failed to ease the crisis, has repeatedly said an invasion is imminent, Reuters reported.

Manic Monday
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Manic Monday

Moscow denies any such plans and has accused the West of hysteria, it added.

The BSE’s benchmark Sensex index plummeted 1,747.08 points, or 3%, to 56,405.84, while the National Stock Exchange’s Nifty fell 3.06% to 16,842.80.

This is the worst single-day drop in the benchmark indices since April last year and wiped out investor wealth worth 8.47 trillion.

Rising geopolitical tensions between Ukraine and Russia, persistent inflation worries due to rising crude prices and a fast-approaching rate hike by the US Fed have created strong headwinds for equity markets globally.

Foreign institutional investors continued to be big sellers of Indian stocks, adding to the pressure on markets. So far in February, FIIs have sold net Indian equities worth 7,692 crore, while domestic institutions have bought net stocks worth 5,837.25 crore. Brent crude price hit a peak of $96.16, the highest since October 2014, due to the Ukraine crisis. As a result, India VIX, which measures investors’ perception of market volatility, surged 23% on Monday.

“Geopolitical tension and the rising crude prices are weighing on investors’ sentiments, leading to a sharp rise in volatility. Last week, US bond yields hit 2% in response to the strong payroll data and the multi-decade high inflation, indicating the possibility of further rate hike projection by the US Fed. All the macroeconomic developments are leading to volatility in major assets classes, including equity, debt, and currency. We expect this increased volatility to hit small/midcaps more than large caps," said Naveen Kulkarni, chief investment officer, Axis Securities.

Other markets, too, fell under the weight of the worsening geopolitical situation.

Japan’s Nikkei plunged 2.33%, Taiwan declined 1.71%, and Hong Kong fell by 1.41%

“European shares slipped to their lowest level in 20 days on Monday, with travel, banking and auto stocks leading the slump as investors fretted over geopolitical risks following warnings that Russia could invade Ukraine at any time," said Deepak Jasani, head of retail research, HDFC Securities.

Investors are worried that geopolitical tensions could lead to a further spike in crude prices and stoke inflation in major economies.

“Oil prices can shoot up further if the ongoing tussle between Russia and Ukraine escalates or due to any retaliatory sanctions by the US. India will be adversely impacted if crude goes any higher, as India will see higher pressure on its balance of payments, as well as it will import higher inflation. The market is also anxious that with rising inflation (on crude strengthening), the Fed may act faster than expected on tapering as well as a rate hike," said Aishvarya Dadheech, fund manager, Ambit Asset Management.

Crude demand is projected to grow to an all-time high in 2022, and thus, experts cautioned that any supply-side disruption due to the Ukraine issue could lead to a further spike in oil prices.

“On a weekly chart, it’s been the eighth consecutive week where price has moved higher. The International Energy Agency raised its 2022 demand forecast and expects global demand to expand by 3.2 million barrels per day (bpd) this year, reaching an all-time record of 100.6 million bpd. Also, the price has inclined to a seven-year high as escalating fears of an invasion of Ukraine by Russia, a top energy producer, added to concerns over tight global crude supplies," said Gaurav Garg, head of research at Capitalvia Global Research Ltd.

On the domestic front, weak factory output numbers released on Friday also contributed to weak investor sentiment. India reported a growth of 0.4% in December, a 10-month low.

“Apart from the unfavourable base, a lack of traction in domestic demand is the main reason for the sharp slowdown in industrial production. There are reasons to suggest that rural demand is particularly weak. The contraction in staples production seems to corroborate this. While growth in primary and intermediate goods and infrastructure seems to suggest a modest revival in investment demand, capital goods continue to do poorly," brokerage Anand Rathi said in a note on Monday.

The government on Monday reported that the wholesale inflation eased marginally to 12.96% in January against 13.56% in December.

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