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Indian shares on Wednesday tumbled on fears that an intensifying conflict between Iraqi militants might push fuel prices and add to the inflationary pressure in the domestic economy.
The BSE Sensex, which had at one point fallen more than 400 points, or 1.6 per cent from its previous close, recovered a little to end the day at 25,246.25, a loss of 275 points or 1.08 per cent. The decline was led by heavyweights Reliance Industries and TCS, each of which fell more than two per cent.
The slump on the market was more pronounced during the mid-day trading session, after Sunni militants attacked Iraq’s largest oil refinery, Baiji, shutting down that country’s power and fuel supplies. Some of the loss was recovered later in day but that did not stop the index from closing in the red.
The NSE Nifty declined 73.5 points, or 0.9 per cent, to 7,558. The rupee also slipped 0.65 per cent to end at 60.39 a dollar, a seven-week low. Brent crude prices rose above $114 a barrel and analysts fear the prices might touch $120 a barrel if the crisis continues.
Analysts said a rise in fuel prices could dampen market sentiment, as around three-fourths of India’s fuel demands were met through imports. A sharp increase could push India’s subsidy bill, possibly derailing the Budgetary allocations of the new Bharatiya Janata Party-led government, which is to present its first Budget next month.
“There can be a knee-jerk reaction if crude oil heads higher than the current level, as that would have an impact on GDP (gross domestic product) as well,” said Angel Broking Chairman & Managing Director Dinesh Thakkar.
“The rise in crude oil prices is a concern for everyone — more for India because oil is a major factor for us from a macroeconomic perspective. Also, if the global turmoil continues, the dollar might strengthen further; that could mean a further ebb in foreign flows,” said ICICI Securities Chief Investment Officer Piyush Garg.
Indian indices on Wednesday also took cues from Asian markets, which fell one per cent after high inflation in the US caused worries the Federal Reserve might assume a more hawkish tone and resort to tighter monetary policy measures. The American central bank is expected to release its policy statement later in the day.
Market participants said investors were also booking profits ahead of Budget 2014-15, as stocks had run up sharply. They expect indices to shed between eight and 10 per cent in the days ahead.
“The market looks ripe for a correction. It has not been correcting because it has been waiting for the Budget. It is unlikely there would be a rally in the next three-four months. In fact, an eight-10 per cent fall would not be surprising,” ICICI Securities’ Garg added.
The Reliance Industries shares came under pressure after the company’s announcements at its annual general meeting in Mumbai failed to excite the investors. The oil & gas sector was among the worst performers, besides power and realty — all of which fell between 1.5 and two per cent on Wednesday. The technology, automobile and banking sectors were down one per cent each.
However, both foreign and domestic investors were net-buyers of equities on Wednesday. Foreign institutional investors (FIIs) net-bought Rs 366 crore worth of shares, while domestic ones net-bought Rs 318-crore equities.
The ongoing Iraq crisis could see a lower FII participation, unless clarity emerges on the future of oil supplies and deliveries.
“For the FIIs, the next big round of buying might come up after the Budget announcements. Markets have run up on the euphoria of a new government. Now, something concrete needs to be seen from the government,” said Motilal Oswal Securities Vice-President (Equities) Rikesh Parikh.
