Indian Indices Open Marginally Lower; Banking and Energy Stocks Witness Selling

Thu, 30 Aug 09:30 am

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Asian shares are trading on a mixed note today. The Nikkei 225 is up 0.1% while the Hang Seng is down 0.7%. The Shanghai Composite is trading down by 0.8%.

Back home, India share markets opened the day marginally lower. The BSE Sensex is trading down by 31 points (down 0.1%) while the NSE Nifty is trading down by 13 points (down 0.1%). The BSE Mid Cap index is trading up by 0.3%, while the BSE Small Cap index has opened the day up by 0.2%.

Sectoral indices have opened the day on a mixed note with oil & gas stocks and banking stocks witnessing maximum selling pressure.

The rupee is trading at 70.77 to the US dollar.

From the aluminum space, Nalco share price will be in focus today as the company has announced a record dividend payout of Rs 11 billion for 2017-18. On a per share basis, the amount works out to Rs 5.7 per equity share of Rs 5 each.

From the pharma space, market participants will also be tracking Pfizer share price today as BSE and NSE have said that they will be placing the stock under the additional surveillance measure (ASM) framework from today.

From the currency markets, extending its downtrend, the rupee fell to a record low of 70.54 a dollar yesterday.

This was seen over concerns about higher oil prices and its impact on India's current account deficit, along with month-end dollar demand from importers, weighed on the rupee.

Note that the rupee has been witnessing selling pressure against the US dollar since the start of this calendar year.

What does the fall in rupee mean for the Indian economy?

A depreciation in rupee means importers buying goods and services at a higher rate that earlier. This doesn't bode well for a developing economy that relies heavily on imports.

On the corporate side, companies who have taken foreign loans from abroad will be impacted. The repayment obligations in terms of principal and interest will rise, leading to a dent in the cash flows and financials.

Further, companies who import a majority of their raw material requirements will get impacted provided they have not hedged their foreign currency exposure.

Looking at the brighter side, rupee depreciation brings a cheer on the exports front.

A depreciating rupee will provide a much-needed cushion to falling exports. However, a falling rupee will not be the only factor to boost exports. There are certain structural issues too which the government needs to address.

In the news from commodity markets, crude oil is witnessing buying interest today. This is seen on the back of signs that Iran sanctions may limit global crude oil supply.

Note that crude oil prices gained more than 1% yesterday and over the week, they rose over 5% on worries of slowing supplies and higher demand.

As per a leading financial daily, oil customers for Iran have started to drastically wind down purchases of Iranian crude ahead of the US sanctions. This was evident from Iran's exports plunging by 6,00,000 barrels per day (bpd) compared with July loadings due to declining flows to India.

Also, another blow to Iranian crude oil comes as French oil major Total SA (TOT) has confirmed that it would end a multi-billion dollar gas project in the country because it is unable to obtain a project-specific waiver from the US authorities.

On the back of above worries, market participants are worried that Iranian sanctions could severely undersupply the oil market in 2018 and that will mean further rise in crude oil prices.

Speaking of crude oil, oil prices have climbed steadily this year, helped by rising demand. However, rising crude oil prices doesn't bode well for the Indian economy, as it not only affects fuel prices, but also has many other repercussions on the macroeconomic level.

They can be a big worry for the Modi government as well as it has been a big beneficiary of lower crude oil prices.

Apart from that, what does rising crude oil prices mean for stock markets?

Richa Agarwal, editor of Hidden Treasure, tracks the oil and gas sector very closely. She believes the rise in crude oil prices is a bearish sign for stock markets globally. At the same time, any market correction, will throw up interesting buying opportunities in small-cap stocks.

This is what she wrote...

• After hitting a low of US$ 30 per barrel in January 2016, prices have more than doubled this year. While the Hidden Treasure team looks for long-term wealth creators, such macro situations can help to recommend such stocks at a bargain. The ones who keeps calm, when everyone else is losing their heads, will gain the most when the tide turns.

Also, it's interesting to note that whenever oil prices have surpassed US$ 100/barrel, they didn't stay there for very long. In technical term, it is sort of 'resistance level'.

Resistance Kicks in Once Crude Touches US$ 100/barrel

This is what we wrote about this in one of the editions of The 5 Minute WrapUp...

• Oil prices have collapsed thrice because of demand destruction: in 1979, 2008, and 2014.
  
  In 1979, the trigger for oil price increase was the Iranian Revolution and the Iran-Iraq war. Due to this, oil prices rose from US$ 50/barrel to above US$ 100/barrel between January 1979 and April 1981.
  
  Then, new production from the North Sea, Mexico, Alaska, and Siberia flooded the market. By March 1986, prices had fallen to US$ 27/barrel.
  
  In 2008, when oil touched US$ 150/barrel, it was quickly followed by the financial crisis and recession.
  
  Then, between 2011 and 2014, when oil was above of US$ 100/barrel, several years of triple-digit oil prices led to a near doubling of shale production in the US, a volume that helped trigger the crash in 2014.

In fact, as per the media reports, even Saudi officials think US$ 60 is a reasonable price for oil in the long term.

It would be interesting to see how Iranian sanctions will influence crude oil prices. Meanwhile, we will keep you posted on all the updates from this space.

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