It seems that for stock markets if it’s not one thing, it’s another. Investors were barely relieved for avoiding a flash crash last month following the US Federal Reserve’s larger-than-expected interest rate cut. But that joy was short-lived as rising tensions between Iran and Israel this week gripped global markets in fear. On Thursday, indices across Europe and Asia incurred significant losses, while Sensex and Nifty lost more than 2 percent each, suffering their worst intraday falls in two months. As the total market capitalisation of the BSE companies plunged to Rs 465 lakh crore, it wiped off as much as Rs 10 lakh crore of investors’ wealth in a day. It’s now crucial that the escalation in West Asia is contained at the earliest; else it could bring about another significant fallout—high crude oil prices.
Global oil prices have already surged as much as 5 percent on Thursday to USD 75 per barrel from the week’s start. If the prices continue to firm up, they will spell fresh trouble for countries like India, which imports more than 80 percent of its oil. Higher prices translate to a bigger import bill and a wider current account deficit, which is anyways expected to increase to 1 percent in 2024-25. Investors are also worried about the recent resurgence in Chinese stocks, which could prompt an outflow of funds from India. Chinese stocks have been underperforming in recent years; but last week saw a strong rally as Beijing rolled out a substantial stimulus package to goose its economy.
Apart from geopolitical concerns, domestic factors have contributed to Thursday’s crash, too. Last week, market watchdog SEBI rolled out six new measures to tame speculative retail trading in the risky futures and options segment, which analysts believe could affect trading volumes. Concerned over these prevailing factors, the Sensex shed over 3,300 points in just four trading sessions as foreign investors pulled out as much as Rs 32,000 crore from Indian markets. Even if the situation in West Asia gets somewhat under control over the next few weeks, the current quarter may still be a testing time for markets given the upcoming state elections, the September earnings season, the RBI’s monetary policy review and the outcome of the US presidential elections in November. Investors should exercise extreme caution at the moment.