File picture of the Bombay Stock Exchange. Indian stock markets managed to ride out the sharp escalation in US-Iran tensions without taking too many losses. Image Credit: Bloomberg

Dubai: Like other oil importers, India’s stock markets too faced a few torrid trading sessions as a result of surging Brent prices - but analysts are optimistic the worst has passed. With tensions de-escalating between the US and Iran, oil prices have eased from $70 a barrel plus... and so have India’s stock indices.

The S&P BSE Sensex index, which regained some of its losses on Tuesday as no fresh escalation in tensions were reported, dropped sharply on Wednesday after Tehran retaliated by firing more than a dozen missiles at two US military bases in Iraq. But when the market closed, it was not before clawing back most of its declines. BSE S&P Sensex was only 51 points lower and NSE Nifty50 ended 27 points lower.

But this was not the case just days before. The benchmark indices on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) recorded steep losses on Monday, with the S&P BSE Sensex down over 800 points. The Nifty 50 index has lost over 3 per cent since January 2, while major indices in the US, UK, China, Russia, Indonesia shed less than 1 per cent. Hong Kong, South Korea and Brazil ended 2 per cent lower.

“Iran is under pressure not to escalate the issue further, and due to the easing in tension in the Middle East the market recovered from prior losses,” said Vinod Nair, head of research at Geojit Financial Services.

Even rupee earns a breather

The attacks posed a major risk for the Subcontinent as it imports most of its oil requirements. Analysts had said that they expected this to strain India’s domestic current account deficit as, historically, rising oil prices have always managed to do so.

But crude recorded its first decline in four days on Tuesday, and though spiking after Iran’s retaliation, settled at around $68 on Wednesday.

In India, higher oil prices aggravate balance of payments and escalate inflation. Like other emerging markets, India faces the threat of a currency crisis, which occurs when a nation is unable to pay for imports. The rupee closed at 71.71 a dollar, up 0.18 per cent from Tuesday’s close of 71.83, but has shed 0.7 per cent since January 2.

“It’s a tightrope walk between maintaining fiscal deficit and increasing spending, and that’s why earnings which have been elusive for long are not picking up,” said Dharmesh Kant, head of retail research at IndiaNivesh Securities Ltd.

Strong mutual fund inflows

Another factor that has stood firm in India’s stock market are mutual fund inflows, which have remained largely unaffected by market gyrations.

The Indian mutual fund industry added, on average, 955,000 SIP [Systematic Investment Plan] accounts each month during the financial year 2019-20, with monthly inflows staying above 80 billion rupees throughout. (A SIP is an investment vehicle offered by mutual funds to investors, allowing them to invest small amounts periodically instead of lump sums.)

“The outlook seems rosier though,” said Nair. “We feel strong foreign portfolio investment inflows combined with the expectation of reforms by the government - starting with the federal Budget on February 1 - will help the momentum in the markets and become more broad-based.

“With liquidity and an expected improvement in earnings growth, the rally will spread to those quality stocks with moderate valuations in the mid- and small cap space, and even in large caps.”