India’s stock market is likely to see a gap-down open on Monday as the Iran war is certain to deliver a crude shock for the world’s fourth largest economy. Expect elevated volatility amid global risk-off sentiment, analysts said.
India’s oil marketing companies, including Indian Oil Corp. Ltd., as well as makers of paint, tyres and chemicals, are likely to come under margin pressure due to higher input costs. Upstream oil producers such as ONGC Ltd. and Oil India Ltd. may benefit from stronger realisations, while defence firms such as Bharat Electronics Ltd. and Hindustan Aeronautics Ltd. could see sentiment support.
“The stock market is likely to move from earnings-driven to oil-driven trading in the near term,” JM Financial analysts Venkatesh Balasubramaniam, Shanay Mehta and Shalin Choksy wrote in a note on Sunday, “Crude remains the key macro variable for Indian equities under the current escalation scenario.”
Every $1 increase in crude oil prices raises India’s annual import bill by $2 billion. A higher import bill translates to a weaker rupee and higher inflation. That, in turn, raises bond yields which eventually compresses equity multiples. The impact on trade, by way of higher logistics and insurance costs, is not even priced in yet.
Israel, US and the Iran war
Over the weekend, Israel and the United States launched ‘Operation Epic Fury’ and ‘Roaring Lion’ that killed Iran’s Supreme Leader Ayatollah Ali Khamenei as well as scores of others in the Islamic Republic. Tehran, which has anointed Alireza Arafi as the interim leader, has responded in kind, targeting US military bases across the Middle East and locations deep within Israel. Major financial centres of Dubai, Abu Dhabi and Bahrain have also come under fire.
The Organization of Petroleum Exporting Countries has announced an increase in crude oil production from April, in an attempt to cool crude oil prices certain to hit $100/barrel when global commodity markets open on Monday. Strait of Hormuz, which delivers roughly 50% of India’s crude oil imports, is choked for all intents and purposes.
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“The near-term impact will be negative…and if crude oil prices remain high for an extended period of time, our balance of trade and balance of payments will be impacted since we import around 85% of our oil requirements,” V.K. Vijayakumar, chief investment strategist at Geojit Investments Ltd., told Hindustan Times over email, “The market will react very negatively.”