Sensex Gets a Crude Shock: A Nifty Indian’s Guide to Market Puzzle

Sensex and Nifty have been severely hit due to the surge in oil prices amid US-Iran tensions.

(Photo: Arnica Kala/The Quint)

Mamma Mia! Here it goes again. India's stock markets plunged on a Terrible Tuesday, not showing basic courtesy to the fact that it was Prime Minister Narendra Modi's birthday.

But then, you could blame it on Saudi oil, that is beyond the control of the government.

One hopes that the 22 September post-birthday bash in Houston thrown by Modi's overseas Indian fans — involving a non-official meeting with President Donald Trump — would provide an opportunity for the PM to whisper to the US President to be kind on importing Iranian oil, whose supplies to India have been suspended because Washington wanted it that way under its nuclear programme-linked sanctions.

It does not help that Iran is alleged to be behind Yemeni rebels who launched drone attacks that hit Saudi refineries, that halted more than half of Saudi Arabia's daily global exports.

Volatility of Oil Prices

Phew! As they say in Facebooksphere about relationship statuses: “It’s complicated”.

Global worries on supplies made oil prices surge by about 20 percent on Monday — the highest in a single day since 1991, when President Saddam Hussein's Iraqi troops invaded Kuwait all of a sudden.

Oil has this nasty habit of catching the ‘Arab flu’ once in a while to send world markets crashing. The Sensex and Nifty, India's leading stock market indices, crashed big time two days in a row.

Should you be worried if you are a middle-class investor? Yes. Should you panic? Probably not.

Keeping Your Head Down in Systematic Investment Plans: A Tough Task

Stock markets are full of strange creatures that occasionally resemble ‘weirdos’ from Lord of the Rings. There are day-traders who punt on indices like they were horses. There are wealthy investors and mutual funds that defend piles of investments by using the bets to hedge against uncertainties.

There are some investors who have borrowed big in an overdose of optimism. Some dive deep to buy when others are selling in panic. You are better off if you know who you are, so that you don't laugh and cry with ‘weirdos’ in a manic-depressive ecosystem that feeds on market-sensitive news.

The Nifty, National Stock Exchange's 50-share benchmark, soared only four days ago, hitting 11,050. But it sank to 10,817 at close on Tuesday, having wiped off all its gains made in 2019.

The mutual fund ads will still ask you to drink the Equities Kool-Aid, SIP by SIP, but it is quite a tough task to keep your head down in Systematic Investment Plans, like a batsman who is happy taking singles while wickets fall at the other end.

Everything is not always Sahi Hai, though markets do have a habit of bouncing back in their long-term journey, helping the mutual fund gospel.

A Worry for Low Inflation

So what's the deal for India? The biggest worry is that the oil price surge, though expected to retrace its steps, hurts the rare sweet spot in India's otherwise-sagging economy: Low inflation.

Low inflation helps the Reserve Bank of India slash interest rates, making everything from home loan installments to project costs cheaper.

It aids higher disposable incomes, demand creation and jobs. India's GDP growth sank to a six-year low in the latest quarterly report, hardly what you would expect from an economy that aims to double its size to USD 5 trillion by 2022. Even BJP leaders like Subramanian Swamy are concerned.

Higher rates means lower growth. Lower growth means lower incomes, fewer jobs than expected, and less exciting corporate earnings.

Even the RBI governor was forced to admit that the central bank was a bit surprised by the bad news on growth.

The Surge’s Ripple Effect

An oil price surge at this juncture means a knock-on effect on petrol, diesel and other fuels that have an across-the-board impact on nearly everything you buy or sell. That means a potential for higher inflation.

The RBI has already slashed its interest rates that guides banks four times in 2019 with not much positive effect to reverse the economic slowdown. An oil spike means taking away a trump card they still had left to play.

India imports 83 percent of its oil needs and Saudi Arabia is the second biggest supplier, after Iraq and ahead of Iran.

The US is standing in the middle of India buying oil from Iran like a mother-in-law in a ‘saas-bahu’ serial.

When India imports more without matching exports, the trade deficit yawns and the rupee weakens.

All that leaves Ms Nirmala Sitharaman, the honourable finance minister, in less honourable shape to spend more from the government kitty to push up demand for industrial goods that in turn aids production, incomes, and growth. The country's fiscal deficit has already hit 77 percent of the full-year amount in only four months into the financial year.

Double Whammy for Indian Economy?

Is that a double whammy India's economy is facing — with layoffs in the automobile industry, and a failure to create enough jobs — haunting policy-makers? Pessimists will say yes, but the mood is such that optimists have to lick a wound or two before saying the sky is pink.

It does not help that the US is fighting a trade war with China, whose latest growth numbers are not exciting.

It does not help that Britain is all mixed up about its Brexit from the European Union, which in turn is slashing interest rates to revive sagging growth. We are not even going near the pile of bad loans and the slow march out of India's banking crisis.

Does that mean it is all downhill? Not necessarily. Clouds may clear once Saudi oil finds its feet again. A lot would depend on when and by how much the oil spike pulls back to cheer the Sensex and Nifty.

For all we know, Ms Sitharaman may find more money from Abu Dhabi and/or Japan and even Saudi Arabia (still very wealthy, thank you) to push infrastructure and growth. But markets hate uncertainties and wait for good news. Optimism may be just two headlines away. To bet or not to bet, that is the question.

(The writer is a senior journalist and commentator who has worked for Reuters, The Economic Times, Hindustan Times and Business Standard. He tweets as @madversity. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)