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Markets skid on oil

Indian stock indices dropped about three per cent on Tuesday, their biggest daily loss since the rupee crisis of September 2013, triggered by a sharp fall in crude oil prices and concern that the Euro zone might disintegrate. The Greek crisis led to investors fleeing from equities into safer havens, including gold and US Treasuries.

Mirroring the global turmoil, in absolute terms, the 30-share Sensex lost 855 points, in absolute terms the seventh-worst drop ever and the steepest since July 2009. The Nifty closed at 8,127.35, down 251.05 points with only two of its components ending positive. Total investor wealth tumbled by Rs 2.75 lakh crore.

Declining about five per cent in two days, Brent crude oil traded below $ 52 a barrel, the lowest since April 2009, on fear of oversupply. Investors were also spooked by fears Greece might abandon the euro zone, with the 19-nation euro falling below $ 1.19, the lowest since December 2005.

“If a $ 4-trillion commodity such as oil falls more than 50 per cent, there will definitely be contagion. Nobody knows who will be hit where. A lot of collateral damage is anticipated. Most global funds have changed their strategy to sell, as there is a lot of risk in the system,” said Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services.

Experts fear the dynamics at play in the oil market, as well as in the euro region, are unlikely to fade easily and will continue to spook the market.

The India VIX index, a gauge of market volatility, rose 23 per cent to 17.42 on Tuesday. “The fall in oil prices is positive for India but in the short term, it will create a lot of volatility. The fear of the  possible exit of Greece from the euro is causing global jitters. This issue might continue to weigh on the market going ahead, too,” said Nirmal Jain, chairman, IIFL Group.

With oil prices dropping and most developed countries facing growth concerns, foreign fund flows into the Indian market are expected to slow this year, say experts. “As weak commodity prices impact current account surplus generation in many countries, flows into India might slow this year,” Neelkanth Mishra, India equity strategist at Credit Suisse, said in a note. He added the Indian market’s global linkage posed a risk. “Indian markets are much more globally-linked than the economy.”

The rout in oil prices saw investors moving to safe-haven investments, with gold prices firming and yields on US Treasuries dropping to below two per cent, amid fears of a global slowdown.

“The fall in oil prices is likely due to a demand or supply problem. If it comes from China, it could signal a slowdown in that country,” said Andrew Holland, chief executive officer of Ambit Investment Advisors.

Most global markets traded subdued, after major European and US markets closed about two per cent lower on Monday. Holland said while the global economy was in turmoil, there wasn’t anything wrong with India per se, adding from here, the downside could be limited.

Blue-chips Reliance Industries and ONGC fell 4.5 per cent and 5.7 per cent, respectively, following weakness in oil prices. Index heavyweights from the banking sector, including ICICI Bank and State Bank of India, dropped four per cent each.

Foreign institutional investors, who had pumped in $ 16 billion into Indian stocks last year, sold shares worth about Rs 1,600 crore on Tuesday, according to provisional data provided by exchanges. Domestic investors, on the other hand, bought shares worth about Rs 1,100 crore.

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