stock market crash: Oil price fall good for India, yet stocks crash. Will sanity prevail?

NEW DELHI: Indian stocks came crashing down on Monday following a jaw-dropping 31 per cent drop in crude oil prices in global markets.

Technically, the major crash in crude oil prices of such a magnitude is positive for India due to its heavy reliance on imported crude. Some estimates pegged $7-8 billion savings for India for every $5 a barrel fall in oil prices. Brent oil prices fell by over $14 a barrel early on Monday, potentially saving India $20 billion in import expenditure.

Yet, domestic stocks lost nearly $65 crore in wealth on Monday.

Analysts said there are always sides to the coin. The crash in oil price will hit commodity-driven emerging economies hard, which may trigger outflows from emerging market funds and India could be a likely victim.

Already investor sentiment has been fragile globally due to the outbreak of coronavirus and domestic equities have seen some Rs 18,768 crore outflows of foreign investor money in last nine sessions.

Monday’s oil price crash, the worst since the 1991 Gulf war, reflects the uncertainty in the oil market due to the impact of virus outbreak on oil demand. Dalal Street veteran Shankar Sharma warned that it could possibly be a sign of a looming global recession.

FPI portfolios have anyway been not overweight on India after the economy clocked a seven-year low GDP print at 4.7 per cent for December quarter. RBI’s move to cut the short-term lending rates in 2019 has proved little help to drive domestic demand so far.

“There has been reasonably large FPI selling, which is putting pressure on the sell side. That was induced more by global spread of the coronavirus with no immediate medical solution visible. Investors are nervous, and they are cutting risk and we are becoming part of the casualty,” said Nilesh Shah, MD at Kotak AMC.

Add the YES Bank saga, which threatens the stability of India’s financial sector, and India no longer remains the best emerging market pick.

Valuation wise, Sensex and Nifty looked rich, despite the recent fall. “Considering the bond yields and historic average valuations of our equity markets, we expect the forward Nifty50 PE to bottom out 16 times. At that valuations, Nifty50 should find support at 10,300 level, which also happens to be the 200-week moving average,” said Rusmik Oza of Kotak Securities.

A fall in crude oil prices, on the other hand, may cut India’s trade deficit, which stood at $133 billion in the first 10 months of this financial year. It may ease retail inflation, which had hit a high of 7.59 per cent in January, and give RBI some legroom to cut policy rates. A fall in crude prices may also lower input cost for a majority of India corporates (hitting commodity-led businesses).

Mriganka Jaipuriyar of S&P Global Platts said low crude prices are surely positive for India. “One should however bear in mind that the demand destruction in oil is not a function of high prices, but a function of a slowdown in manufacturing in industrial production, air and road traffic,” he said.

“Had this been any other time, it may have been a lot more beneficial for these emerging economies,” he said.

Arvind Sanger, Managing Partner at Geosphere Capital Management, said whenever there is a global economic slowdown, India has never been a winner. “If oil is going down partly because demand is very weak, that does not help any economy and India is no island,” said he.

What analysts say

Analysts said the ongoing crisis offers an investment opportunity , but warned investors not to buy stocks blindly.

Jain, ED & CIO at HDFC Mutual Fund, says the market usually returns to sanity after such a big fall. He is optimistic about the market outlook given the lower interest rate environment and falling crude prices.

“This crisis is a good time to invest in Indian markets,” Jain told ET NOW.

Given the ongoing uncertainty over coronavirus, Sharma said investors must let things play out instead of trying to time the peak of the virus outbreak. “Aggressive stance in this market is not warranted, given how the virus outbreak is unfolding,” he said, adding that it is better to buy 10 per cent higher than moving into the market blindly.

Sanjay Dutt of Quantum Securities said that there is no place where an investor can really hide. “Just hold down to your cash and sit it out. If you are brave enough venture out. Otherwise, just quietly let it all settle down. World is not coming to an end. I am sure of that at least,” Dutt said.

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