Stock market investors are worried a lot, as equity benchmarks Sensex and Nifty have fallen in nine of last 10 trading sessions. Since the market is always forward-looking, it has started pricing in a scenario wherein global financial conditions would tighten up further and oil prices may stay higher, probably touching $100 a barrel mark, in coming months due to ongoing geopolitical tensions. They are the two biggest concerns weighing on the sentiment at present.
Rupee Weakening
The rise in dollar on upbeat US economic releases and resultant fall in rupee is the third big concern for the market. Tightening due to high 10-year US bond yields, which hit 5 per cent mark recently, also lowers attractiveness of emerging equity markets and, for India, like others, a depreciating currency can intensify foreign equity outflows. This is the concern number four for the market. Lastly, Thursday marked the expiry of monthly F&O series and Nifty has already fallen below a crucial support, which heighted volatility and supported a bearish bias.
At a low of 63,119.21, Sensex has now tumbled 3,308 points in six sessions. Nifty has fallen 962 points as it slipped below a support of 18,850, before recovering some ground.
US bond yields & tightening
Bond yields usually have inverse relationship with equity. This is because when yields rise sharply, they increase cost of capital.
A rise in bond yields suggest companies may have to pay a higher interest cost on debt. Besides, they increase opportunity cost of investing in equities.
Rising bond yields and ‘a higher for longer’ interest rate scenario in the US has made emerging economies take note. Recently Indonesia’s central bank ‘Bank Indonesia’ unexpectedly increased interest rate to defend Indonesian Rupiah despite low inflation.
Rising oil prices
rising oil prices have contributed to the stock market weakness in recent weeks. There are a few reasons for this:
- Higher input costs. Oil is a key input for many businesses, so higher oil prices lead to higher costs for businesses. This can squeeze profit margins and lead to lower earnings.
- Reduced consumer spending. Higher oil prices can also lead to reduced consumer spending. This is because consumers have less money to spend on other goods and services when they are spending more on energy.
- Uncertainty and risk aversion. Rising oil prices can also create uncertainty and risk aversion among investors. This can lead investors to sell stocks and move their money into safer assets, such as bonds.
In addition to these factors, the stock market has also been under pressure from other factors in recent weeks, such as rising interest rates and concerns about a potential recession.
Here are some examples of how rising oil prices have impacted specific stocks and sectors in recent weeks:
Rupee weakness, FPI outflows
Data available with NSDL showed FPIs have dumped Rs 9,935 crore worth equities in October so far. This was in addition to Rs 14,768 crore outflows in the previous month.
In the case of rupee, the local currency was trading 3 paise lower at 83.20 against the dollar in early trade today. There are, however, hopes that narrower trade deficit along with the RBI’s intervention in the forex) market may restrict depreciation.
Way Forward
As rising oil prices, shifting global financial conditions, and currency depreciation continue to impact the market, investors are closely watching for signs of stability and potential opportunities in the face of this complex economic landscape.
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