T
his week has seen further pressure on the Indian equity markets due to rise in crude oil prices, increased tensions in West Asia and higher global bond yields as it impacts the sentiments of the investors. Despite the benchmarks ending with almost flat movement on Friday's trading session, the weak picture prevailed for the week.
Nifty ended its trade on August 21, at 24,252 levels with a marginal 0.08% growth in the same period. While BSE Sensex ended at 77,540.83 levels. Both benchmark indices recorded falls in their weekly performance by around 0.5% and 0.6% respectively this week.
Among the reasons impacting Indian financial markets, a steep hike in the price of crude oil remains one of the main factors. Due to tensions continuing in West Asia, uncertainties prevail over supply of global oil.
For India, the increase in crude prices is significant factor due to the fact that India relies heavily upon imported oil. High cost of oil may raise India's import bill, increase pressure on current account and may cause an increase in inflation in the country. In the long run, such trend may negatively impact the profitability of companies and consumer spending.
Rise in crude prices therefore has made investors much more cautious especially regarding sensitive sectors in this respect.
Ongoing conflict and uncertainty in the region of West Asia is another source of risks for global financial markets. Investors are paying great attention to the situation as further escalation will result in increase in crude prices.
Analysts suggest that in the absence of improvement in the geopolitical environment or other positive domestic news, Indian equities may remain range bound.
Increased global bond yields can affect the investor sentiment too. In case of higher bond yields, people may prefer to invest in bonds, which are less risky compared to equity.
Combining increased crude price level and higher bond yields creates tightened financial conditions globally. Reuters mentioned these factors behind weakened risk appetite among investors as well as pushed Indian shares down last week.
Indian rupee also remains under pressure. Rupee closed the week at ₹95.69 against the USD, recording a decrease by approximately 0.3%. Higher oil prices and demand for dollars have caused rupee depreciation.
In turn, this leads to higher costs of imported goods, including crude oil. Such development brings additional problem for Indian economy because increasing import expenses could cause inflation. According to Reuters, the Reserve Bank of India has started to intervene in forex market.
It should be mentioned that the performance of market was not equal in different sectors. During the week, 12 of 16 main sectors declined their quotes, what demonstrates selling pressure on relatively wide base.
IT sector's quotes dropped by approximately 2.6% whereas private banks performed better than others. Small caps outperformed midcaps since the small-cap index was up approximately 1.2% whereas mid-caps declined by approximately 0.1%.
As another point, the behavior of foreign investor affects the Indian stocks as well. Foreign Investors continue to take their capital from India according to some analysis quoted by Reuters.
On the other hand, rich IPO schedule in India competes for the liquidity of market participants. Initial public offering, institutional placement and block deals could draw off capital from stock market of India.
In the short run, there is an expectation that Indian stocks will remain highly volatile and mostly range-bound. The movements in oil prices, events taking place in West Asia, global yield levels, and investments flows will be key determinants of how the markets move.
Despite the ongoing difficulties, the domestic economy continues to offer some sort of comfort. Improvements in corporate earnings and domestic demand could help in regaining momentum in case the pressures subside. At least for now, it seems likely that investors would remain selective without being aggressive in their approaches.
In this context, it is obvious that at the present time, the Indian market is balancing between strong fundamental situation on the domestic front and difficult situation globally. Friday's slight bounce gave some comfort, but the drop during the week showed that investors were not willing to take a decisive stance.
