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When can Indian stock markets recover? Crude oil prices, Global cues, Policy Action, Political scenario

The domestic markets will recover if there is a drop in oil prices. The volatility seen these days is expected to continue for some more time


Watch for:

  • Crude oil prices

  • Global cues

  • Policy Action

  • Political scenario

The stock markets are in a bear phase. In fact, the markets are witnessing one of the worst phases in the recent past. Last week, on Monday, the bourses were in the red by $50 billion. The markets lost all the gains of the current year in market value with a depreciation of close to $50 billion on that day, amidst a fall of over 500 points in the benchmark Sensex. The Sensex plunged 506 points to close at 15,066 points - it's the lowest in the current fiscal.


The cumulative market capitalisation of all the listed companies fell below the Rs 50 trillion mark. Out of this, nearly half the loss, amounting to about Rs 1 trillion, was contributed by the 30 biggest blue chips, which constitute the Sensex. The Sensex has also shed close to 6,200 points from its all-time high of 21,206 points reached earlier this year. By the end of last year, the total market value of all the listed companies was approximately Rs 72 lakh crores - a gain of close to Rs 35 lakh crores - during the year. However, following the recent downslide on the bourses, more than half of the total gains registered during 2007 have been wiped off.


Crude oil prices


Analysts expect the Sensex to stay around the 14,000 level for some time. One of the major reasons for the fall includes the rising inflation rate, fuelled by the rising oil prices. A surge in crude oil prices, and drop in the Dow index, led to a knee-jerk reaction in the Asian markets. If crude falls below $138, there could be a recovery which will impact domestic markets. With crude prices having crossed $139, a recovery in equity values now depends on a softer trend in the price of crude.


Global cues


A similar trend can be observed in other markets too. European stocks too fell due to the rising crude prices and weak employment data in the US. The markets are reacting to the impact of a high fuel bill and a slowdown in the US economy. The situation in the US is getting worse, going by the unemployment figures. The are chances of the domestic markets sliding further. There are fears about Europe also, as the central bank there has clearly indicated the possibility of a hike in interest rates.


The outflow from foreign institutional investors (FIIs) can cause further declines. FIIs have already sold $5 billion this year. They will feel the pressure to unwind positions since all off-shore derivative instruments (ODIs) need to be extinguished by March 2009 and there is a limit of 40 percent for assets under custody on ODIs in the cash segment. FIIs control a bulk of trading activity on the bourses. Any sell-off by the FIIs can trigger major falls in the market. FII actions determine market sentiments.


The stock markets' reaction was due to adverse news coming in from all corners - abroad and local markets. Inflation is the main cause to weigh down market sentiments.

Policy Action


The Government's recent move to hike petrol and diesel prices will have a cascading effect on inflation, considering their higher weight age in the wholesale price index (WPI). Already there are fears that the inflation rate is likely to cross nine percent in the weeks to come and may even move to double digits.


A further rise in inflation would trigger a sharp reaction from the Reserve Bank of India (RBI), which has already indicated that it will take tough measures to tackle it. The RBI is expected to effect a hike in the cash reserve ratio (CRR) for banks, which will tighten liquidity, to tame inflation. The RBI may hike the short-term interest rates also. The RBI governor had said the situation was extraordinary in respect of oil prices and that the basic approach of the bank was to carefully manage liquidity conditions. Rising oil prices and inflation could pose major problems for the mounting deficit situation. Rising crude oil prices are likely to put pressure on the deficit front, as 70 percent of domestic oil consumption is sourced through imports. This means a problem for oil marketing companies, which could face higher under-recoveries, as the oil price offered to the consumers is hugely subsidised. The macro environment continues to worsen due to rising oil prices, higher inflation, and the increasing fiscal and current account deficits.


Many individual investors have stopped investing in equity. The turnover on the bourses has been low. There has been a predominance of put options, which indicates that traders expect a decline in stock prices.


A recovery in Asian markets and decline in oil prices will help domestic markets come back. The domestic markets, however, will continue to be volatile for the next few months.

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