Why the stock markets are on a roller-coaster ride
Since April 1 this year, Brent crude oil prices have surged by 24 per cent
The Indian stock markets have been on a roller-coaster ride of late, with big swings in sentiments, creating big losses to investors on one day, and giving big gains on another.
For instance, in the week that has gone by, the Bombay Stock Exchange benchmark Sensex lost over 1000 points in intra-day trade on October 11, a day when import duties on 15 more items were hiked by the Centre to 20 per cent to rein in the current account deficit (the difference in value of the country’s imports compared to exports, and India imports more than it exports) and shore up the rupee.
However, the markets made a smart comeback the next day with the Sensex posting its biggest point-wise gain in over two years amid global markets’ recovery, compared to the severe selloff in the previous session.
Sensex closed Friday’s session 732.43 points, or 2.15 per cent, higher at 34,733.58. What is of concern to investors, leading to them pulling out money from the stock markets, that ends up in highly volatile trading sessions on the stock markets, are mainly three — the rising global oil prices, rising interest rates in the US, and the rising trend of trade protectionism around the world, resulting in trade wars.
Crude oil prices have been surging after the Organisation of Petroleum Exporting Countries, or OPEC, decided to cut production levels.
Since April 1 this year, Brent crude oil prices have surged by 24 per cent, from $68 per barrel to $84 as on October 5.
High oil prices spike the country’s import bill as it buys most of its oil from overseas, widening the CAD to 2.4 per cent of the GDP in the first quarter.
In 2017-18, India imported 219 million tonnes of crude oil worth around $88 billion (Rs 6.5 lakh crore), as per oil ministry data. Every dollar per barrel change in crude oil prices impacts the import bill by Rs 823 crore.
If rising oil prices rattled consumers, the falling rupee, driven by the widening CAD, has shaken up the financial markets.
The rise in crude oil prices has exerted pressure on the current account deficit of oil importing countries such as India, which has further led to depreciation of the currencies, says a report from Crisil.
From 65.1 to a dollar on April 2 this year, to 71 on August 31, the rupee depreciated 9 per cent, which Crisil attributes to "the RBI move to increase the repo rate twice by 25 basis points in this period".
It weakened further (74.4 to a dollar on October 9) after the US Federal Reserve raised interest rates for the third time this calendar year.
This has resulted in foreign capital outflow from the economy to the tune of $11.223 billion (over Rs 8,300 crore) by September-end, that further pressured the Indian currency, the Crisil report adds.
This has been a big cause of worry for investors, causing them to exit Indian markets and seek havens elsewhere.
The other big global factor hurting India and other emerging economies is the China-US trade war. As the two countries imposed tit-for-tat tariffs on each other’s goods, crude and base metal prices got impacted, as did investment across borders.
The US has imposed new tariffs of $200 billion on Chinese goods arriving on its shores this September, even as China said it would retaliate with tariffs on another $60 billion of US goods. Although the US move to clamp tariffs on steel and aluminium imports in March this year may not hurt India in a major way, the country needs to tread carefully.
(Courtesy of Mail today)