After the recent rally of about 10%, the market is drifting cautiously as crude & commodity prices elevated quickly. Fall in crude prices was one of the key reasons for the Indian market to bounce. A lot will depend on the development of war and commodity prices for future trend.
Last week there was a hope that scheduled meetings between Russia & Ukraine will help to break the ice. But insignificant improvement in the tensions and latest geo-political issue in the middle east dented the chances. Crude prices surged from sub $100 to $124, latest peak was $138.
However, domestic sell-off was curbed this time though commodity prices were boiling due to reduction in FIIs selling after the in-line Fed policy dated 16th March. Today, FIIs are on a marginal buying mode but with high volatility reacting to war, commodity, and future monetary policy news.
Domestically, the rise in bulk diesel prices and inflationary trend is bending the sentiment, which had improved last week. It is having a negative effect on the economy, especially on consumption, transportation, and logistics sector.
We will see further rise in the consumer goods & services in the future. However, the extent of price rise may be muted due to consequent price hiked recent. This will impact the margin. The consumption industry will try to adjust the quantity & quality of products to limit the effect. But constant price hikes will affect demand & profitability. A downgrade in earnings growth and outlook is expected till the situation persists.
On a long-term basis, crude prices have a positive relationship with the Indian market. Both move in tandem to global market and improvement in global & domestic economy. In between, short-term negative relationship is developed when crude prices elevate & economy weaken or vice versa when prices turn negative & economy robust.
India is profoundly impacted as a heavy importer of crude and when prices rise elevated. Today, supply issue, the war in Russia & Ukraine, geopolitical issue in Gulf regions and a slowdown in economy due to fall in demand owing to war, rise in covid cases and high inflation is impacting Indian market.
After the recent rally, the market is getting cautious, and volatility is rising. India’s downgrade risk of future earnings growth and valuation is increasing. A lot will depend on war and improvement in supply. It will help to sustain the resilience of the domestic market else it will be a challenge. Historically, such geopolitical has lasted on a short-term basis. But the persistent ideology of both the leaders and differences between the current and other conflicts will have a long-lasting effect on the war period.
Buy at dip is the best strategy today. We should note that the market may trade within a channel with a negative bias in the short-term. Traders will have to buy at the lower band and trend cautious at the upper band. For a long-term investor, it may be a good time to accumulate high-quality stocks available at appealing valuations.
First published in Money9