Equities rally but geopolitical concerns continue to weigh

Indian stock markets extended gains for the third consecutive session amid positive global cues on Wednesday, even as geopolitical uncertainties and their economic fallout continue to plague the near-term outlook for equities. Progress in RussiaUkraine ceasefire talks boosted the Sensex and the Nifty by 1.28% and 1%, aided by a decline in crude oil prices.

Indian markets were supported by gains in Asian indices. Taiwan, Hang Seng, Shanghai Composite, and Jakarta Composite index closed with gains of 0.59%- 1.96%.

“High volatility prevailed in the global market, but peace talks between Russia and Ukraine gave hopes of a de-escalation of the war, helping the domestic market trade with confidence,” said Vinod Nair, head of research at Geojit Financial Services. Easing crude oil and commodity prices supported the market, he said.

The recovery is helped by positive global developments and some softening in crude prices, amid expectation that ongoing peace talks brokered by Turkey may lead to the end of the war. However, V.K. Vijayakumar, chief investment strategist, Geojit Financial Services, said these are still early days.

There are still uncertainties associated with the ongoing peace talks and till the conflict is resolved completely, volatility may continue, said many experts. European markets were trading weak on Wednesday and experts attributed this to scepticism. For countries such as India, higher crude prices will pose challenges and are likely to put pressure on margins and earnings of companies.

Experts are also of the view that though crude oil may have come down from its peak, looking at supply-side challenges, it may remain close to $100 levels for some tome. Even if the war ends, the sanctions may not be lifted immediately. With supplyside constraints continuing, commodity prices are expected to remain elevated.

External factors still pose a material risk to India’s investment case, HSBC Securities and Capital Markets (India) Pvt. Ltd said in a March 30 report. If crude stays above $100, it would pose a key macro challenge for India, HSBC said. Second, rising US bond yields and the end of easy liquidity are also negative, though these are not new unknowns acc-ording to HSBC. The geopolitical situation also presents its own uncertainty, but if progress towards peace is visible, this may also present an upside risk. Brent crude was hovering around $112 a barrel on Wednesday, lower than its closing levels of $119.75 on March 25. However, it is still much higher than the $101.23 a barrel level it closed on March 16.

Higher crude prices also continue to put pressure on the rupee. Demand for dollar from oil marketing companies pushed the pair towards 75.91 by the close of trading, said Anindya Banerjee, vice-president, currency derivatives and interest rate derivatives at Kotak Securities Ltd. Banerjee expects rupee to trade between 75.60 and 76.20 on spot.

Foreign portfolio investors continue to be net sellers, having sold equity worth ₹112,469 crore in 2022 till March 29. Domestic investors have supported the markets well, buying equity worth ₹101,328 crore.