The Indian electorate in key states goes in for Phase III of Lok Sabha elections on 23rd April. A total of 115 seats across crucial states like Gujarat, Maharashtra, Karnataka and Jammu & Kashmir will go to polls on 23rd April. By the end of the 3rd round voting for 300 seats would have been completed with the remaining seats likely to be completed in 4 rounds. The first 2 rounds saw a voter turnout of nearly 70%. The final results are expected on 23rd April. The long drawn election process is causing a lot of volatility in the market as is evidenced by the rising VIX on the NSE.
It was ultimately oil that took its toll on the Nifty and the Sensex. The Nifty corrected 158 points and the Sensex fell close by 500 points on oil worries. On a day when the sharp rise in crude oil prices dominated market sentiments and took the Sensex down by nearly 500 points, NSE also excluded 34 stocks from the F&O list effective June 28th. Most of the stocks excluded had shown sharp bouts of volatility in the last 6 months and failed to meet F&O criteria. According to the NSE press release, the list includes Jet, Suzlon, and PCJ among others. This is likely to reduce the F&O induced volatility in the markets.
There is good news for Asia on the FPI flows front. March 2019 FPI flows into Asian bonds the best since January 2018 with foreign portfolio investors (FPIs) pumping money into Asian bonds as US yields turned tepid amidst continued uncertainty over the trade war. FPIs bought close to $5 billion worth of Asian bonds in March with the predominant flows into India and Indonesia. Korea and Malaysia also saw frenetic buying in their bonds. However Thai bonds saw selling on political uncertainty. Stabilization of currencies across the Asian region has also increased FPI confidence in EM debt.
Fear index of the VIX has started showing signs of worries at higher levels. The NSE Volatility Index (VIX) touched a 3-year high of 24.56 on Monday but closed lower at 24.05; the highest level in 3 years. The VIX is also called the Fear Index and has recently spurted ahead of the general elections. Normally, high levels of VIX are indicative of caution in the market and over longer periods of time, the VIX and Nifty have been negatively correlated, according to data put out by the NSE. It is this negative correlation that has led to stock market corrections whenever the VIX has gone above the 25 levels in the past.
On Monday, it all boiled down to crude prices. Brent Crude spurted 332 bps to $74.36/bbl on the official imposition of Iran sanctions. This was after Donald Trump confirmed that the 6-month relief granted for the purchase of Iranian oil will not be extended beyond May 02nd. In November, the US had allowed India, China, Japan, and Korea to continue buying oil from Iran for a period of 6 months. That will cut supply by nearly 2 million bpd in the global oil markets. At the same time, Iran has threatened to shut down the Strait of Hormuz in response to American sanctions. Strait of Hormuz, controlled by Iran, is a vital waterway to transport crude from the Middle East to East Asia and parts of Europe. Currently, close to 1/5th of world oil moves through the Strait of Hormuz and could disrupt oil prices in a big way.
With oil spurting by 3.32% in a single day, the immediate impact was felt on the value of the rupee. The rupee weakened by 45 bps as sharply higher prices of oil was expected to widen the trade deficit and also worsen the CAD situation. In late 2018, the sharp fall in the INR had coincided with crude rising to $85/bbl. Dollar swap auctions have also been a ceiling for rupee strength. There is another $5 billion dollar swap auction scheduled this week and that could put further pressure on rupee since the dollar swaps will exchange the dollars with banks into rupees thus creating demand for dollars.
