Vipin Malik, Chairman & Mentor-Infomerics Ratings.
New Delhi [India] October 8: A sell-off propagated on 30 Sept’24 amid escalating geo-political crisis in West Asia, following the Israel’s attack on Lebanon, and China’s rebound of the stock market. China’s stock market has bellowed back, revived by an aggressive economic stimulus package. The sheer scope of the measures sparked a strong market rebound. In the near term, it is expected that the rally to provide opportunities in sectors like tech and consumer goods. However, though the stimulus is a step in the right direction, broader, deeper economic changes will be needed to keep the momentum going.
The Indian stock market witnessed a plunge on 30 Sept’24, when the BSE Sensex dive down below 85,300, and Nifty50 declined below 25,850. The BSE Sensex ended the day at 84,299.78, down 1,272 points, whereas Nifty50 closed at 25810.85 down 368 points. However, on the 1 Oct’24, the NSE Nifty50 opened 0.35% higher at 25,899, while the BSE Sensex opened 0.34% higher at 84,585.
The Morningstar China Index rose 13.7% following the government’s announcement of a massive stimulus package, including 800 billion Chinese yuan ($114 billion) in support for equity markets. Since the index’s market capitalization is $2 trillion, this is a significant injection. The impact of this move was also seen in the Morningstar Emerging Market Index, which rose 5.5% over the week.
The geopolitical tensions are escalating. Prime Minister Benjamin Netanyahu issued threats to Iran, even telling Iranians they will be free from their regime “a lot sooner than people think.” The messaging comes after Netanyahu said in his address to the United Nations General Assembly, that “there is no place in Iran that the long arm of Israel cannot reach, and that is true of the entire Middle East.”
According to the Israeli military, armoured units and regular infantry were joining its ground operations in Lebanon, for creating further pressure on Hezbollah, preparing to retaliate against Iranian missile attacks. According to media news, Israel’s addition of infantry and armoured troops including the Golani Brigade, indicates that the operation may escalate beyond limited commando raids. The major issue is that a retaliation from Israel could target oil production facilities inside Iran and other strategic sites.
Impact on the Indian Economy:
The rupee declined to almost 83.79/$, due to aggressive selling by the foreign institutional investors (FIIs). Elevated dollar demand on account of equity-related outflows could also keep the rupee under pressure. Despite India surpasses China in the MSCI Emerging market (EM) Index, India’s stock market valuation is sketchy. On the other hand, how the Chinese market react to the stimulus would have some impact on Indian stock market including other emerging markets.
Nonetheless, one positive is the Fed has started softening the rate cycle which would be positive for the EM markets going forward, where further rate cuts are being expected. How the political economy will behave especially in the context of the US elections, the immigration and trade policy would be crucial. The developments of bi-lateral relationships and minimizing conflicts among countries would be the key for economic growth and progress.
While oil prices have shown better picture, how this would turn out amid the geopolitical challenges in the West Asia and middle east is yet to be seen. The oil prices have recently skyrocketed nearly five per cent following the Israel-Hezbollah conflict, and related developments. Globally, there are upward trends in WTI crude (increased by 8%), Brent Crude (increased by 7%), Murban crude, natural gas etc.
India has strategically started much earlier to diversify its sources, e.g. India’s close alliance with Russia in this regard. India was the second-largest buyer of Russian fossil fuels during June 2024. However, India also heavily dependent on Middle East countries including Saudi Arabia, Iraq, Kuwait, UAE. In August’24, Russia’s share has declined to 36%, whereas in July’24 the share was 44%. In May’24, Russia accounted for 41% of India’s 4.8 mmbd in crude imports, while Iraq’s share stayed at 20%, Saudi Arabia accounted for only 11%, and the U.S. share remained 4%. India purchased more than two mmbd from Russia in July’24 due to discounted prices. However, while in Aug’24, Russia’s share in crude oil imports to India have declined, the cumulative share of the Middle East countries has increased to almost at 45% from 40% in July’24.
A big potential danger is that if Israel attacks any oil installations of Iran, that could increase crude oil prices substantially. In India, there is certain downward impact on tyre and paint companies, as such industries depend on heavily on petroleum-based raw materials. Oil-dependent industries might face possible squeeze in their margins, which may push supply-side inflationary bottlenecks.
A related issue is that already India faces a strained current account deficit (CAD), the risk of fuel prices passing through the consumption basket can be a major headache. Though fuel has a 6.84% (almost 7%) weight in the CPI basket, and on average, roughly $10/per barrel increase in crude oil prices might escalate the CAD by 30-40 basis points (bps). However, the actual impact would be depending upon the trajectory of the ongoing geopolitical tension.
Syndicated press content is not written by ED Times
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