Sensex, Nifty Slip as Crude Prices and Inflation Interrupt a Winning Run

Synopsis

Banking stocks led the retreat for the Nifty 50 and the Sensex on Friday, closing at 25,144.30, down 0.61 per cent, and 81,592.45, down 0.39 per cent, respectively. Retail inflation at 6.09 per cent, likely to give the green flag to December rate hike, and a sell-off from Nvidia made global markets jittery. The two indices were still up for the week and are around nine per cent higher than their close in October.

Friday saw a decline in Dalal Street stocks. The Sensex dropped 318.56 points, or 0.39 per cent, to close at 81,592.45, while the Nifty lost 155.05 points, or 0.61 per cent, to settle at 25,144.30. The previous session saw the market at 81,911.01 and 25,299.35 respectively.

The source of the stock sold

The declines were led by financials. The bank and private banks performed negatively underperforming the benchmarks by 0.7 to 0.8 per cent. Investors took profits in the banking, auto and information technology sectors after the rally, bringing down the Bank Nifty by 0.8 per cent. The session wiped off the value of approximately ₹2.1 lakh crore.

The Nifty Midcap 100 and Smallcap 100 indexes dropped 0.24 per cent and 0.26 per cent respectively. The volatility index tumbled 7 per cent, indicating a “disorderly” decrease.

The week was not wiped out by the fall. After a week of the best performance in over six years, both the Nifty and Sensex moved forward by 0.5 per cent and 0.7 per cent, respectively, in five sessions. Both indexes are still approximately nine per cent. up against the close of October at 23,053.10 and 74,459.53.

The inflation and crude connection

Profit booking, RBI's expectation of a rate hike in the upcoming December, and retail inflation increasing to 6.09 per cent in October weighed down the market. That made matters worse.

India is more dependent on oil than most big economies as it imports most of its crude. Increased prices increase the import bill, push up fuel and transport costs and cut corporate profit margins. It's a different story from what the day's move implies. SBI Research says the price of the oil is still 11 per cent lower than it was before the US elections.

Global cues

Abroad, sentiment was no milder. Wall Street Nvidia sell-off was one of the reasons behind Indian indices' downfall. The US 10-year yield spiked to 5.105 per cent and the dollar index touched a 19-month peak. As you would expect, a higher U.S. yield and a stronger dollar will attract money out of emerging markets, though buying foreign stocks in India has thus far resisted.

What lies ahead

Foreign investors have purchased about $8 billion of Indian stocks this month – a buffer as described in our accompanying report. The Reserve Bank's December 2-4 policy meeting, the trend of crude oil and the possibility of November's inflation reading matching the October rise are the next tests to watch.

The Nifty had a loss of 0.6 per cent following a rally of this size and is more of a pause than a reversal. It will be either inflation or crude that decides which it is.