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Escalating tensions in oil-rich Iraq took the wind out of the sails of Indian stocks and stalled the rupee's rise against the dollar on Friday.
Indian equities and the rupee, which have had a smooth run since a new government took charge at the Centre, posted their steepest single-day fall in about four months, after crude oil prices rose to nine-month highs, following Islamist militants seizing various cities in Iraq. Prices of Brent crude oil were trading at $113 a barrel.
Fears of a full-blown civil war in Iraq, Organization of the Petroleum Exporting Countries' second-largest oil producer, hit the risk appetite of investors, who took money off risky assets. This impacted most global equities and developing market currencies; gold saw some buying. (CRASH COURSE)
The benchmark Indian equities - Sensex and Nifty-declined about 1.5 per cent each, the most since February 3, while the rupee fell the most against the dollar since January 24. The domestic currency declined by 0.52, or 0.87 per cent, from Thursday's close of 59.25 to 59.77, the lowest since May 12.
The Sensex fell 348 points, or 1.36 per cent, to 25,228.17, while the 50-share National Stock Exchange Nifty declined 107.8 points, or 1.41 per cent, to 7,542.1. The BSE small-cap index fell 3.1 per cent, the BSE mid-cap index 2.5 per cent and volatility index India VIX shot up five per cent.
Shares of oil marketing companies took a beating on concern that the high crude oil prices would increase the subsidy bill. State-owned Indian Oil Corporation and Bharat Petroleum Corporation dropped about five per cent each, while Hindustan Petroleum Corporation fell 8.2 per cent.
The fall in the Indian market was in line with other global markets. Most European markets were trading about a per cent lower, while Asian markets such as South Korea fell about a per cent.
According to a Reuters report, Sunni insurgents have gained more ground in Iraq, moving into two towns in the eastern province of Diyala, after security forces abandoned their posts. The insurgents extended their advance to towns only about an hour's drive from Baghdad. The report added trucks carrying Shia volunteers in uniforms rumbled towards the front lines to defend the city, stoking concern of prolonged unrest.
"As long as Iraq tensions remain, these will keep oil prices on the boil. If oil prices remain high, it will be huge damage to India. This is something the market will be worried about. Unless there isn't a quick solution to the Iraq crisis, Indian market will continue to face headwinds," said U R Bhat, managing director, Dalton Capital Advisors.
Analysts said a sustained rise in oil prices would worsen the outlook for inflation and the country's current account deficit, as well as hurt the rupee and equities.
Prices of gold, perceived to be a safe-haven investment, rose through the past two days, following tension related to Iraq. The commodity added about $12 in two days and was trading at $1,274 an ounce.
"Of late, Iraq started supplying two-three million barrels a day of crude oil to the world market. Crude oil prices are going up amid fear of supply disruptions. These prices are unlikely to cool off soon. Gold is seeing safe-haven buying from investors after a long period of consolidation," said Gnanasekar Thiagarajan, director, Commtrendz Research.
A report by the International Energy Agency, however, played down fears of a possible drop in oil exports from Iraq. In its monthly oil market report, said if the conflict in Iraq didn't spread, it might not put additional Iraqi oil supplies at immediate risk.
Back home, foreign institutional investors (FIIs) continued to pump in money into Indian stocks. According to provisional data, FIIs net-bought Indian shares worth about Rs 1,100 crore on Friday.
"It is too premature to raise concern over oil prices. The extent of foreign infows will ensure there isn't much pressure on the rupee. Serious investors will not worry too much about short-term issues," said Saurabh Mukherjea, chief executive (institutional equities), Ambit Capital.
