Indian Indices Open on a Positive Note; Sensex Up Over 490 Points

Asian shares are trading on a mixed note today. The Nikkei 225 is down 0.2%, while the Hang Seng is up 1.1%. The Shanghai Composite is trading down by 0.1%.

Back home, India share markets opened the day on a positive note. The BSE Sensex is trading up by 492 points (up 1.5%) while the NSE Nifty is trading up by 116 points (up 1.2%). The BSE Mid Cap index is trading up by 1.9%, while the BSE Small Cap index has opened the day up by 1.5%.

Sectoral indices have opened the day on a positive note with auto stocks, metal stocks, and energy stocks witnessing maximum buying interest.

The rupee is trading at 73.78 to the US dollar.

Market participants will be tracking Hindustan Unilever share price, Karnataka Bank share price, Tata Sponge share price, and 3I Infotech share price as these companies are scheduled to announce their second quarter financial results today.

In news from the commodity space... After witnessing selling pressure yesterday, crude oil prices steadied today. This was seen on the back of sharp fall in equity market overseas and also because of indications that supply concerns have been overblown.

The Organization of the Petroleum Exporting Countries (OPEC) cut its forecast of global demand growth for oil next year for a third straight month, citing headwinds facing the broader economy from trade disputes and volatile emerging markets.

The OPEC sees the oil market as well supplied and is wary of creating a glut next year, the group's secretary-general said yesterday.

Note that oil prices fell to two-week lows yesterday as it extended big losses from the previous session amid a rout in global stock markets, with prices also hit by an industry report showing US crude inventories rose more than expected.

Speaking of crude oil, almost every time a rise or fall in the stock markets is invariably linked to crude oil prices.

Logically, it seems right too. Rise in crude oil increases input costs for dependent firms. It also means rising inflation. Rising inflation means rising interest rates.

It also puts pressure on the government to cut excise duty, thereby impacting its revenues. We have already seen that happening. After all, there is an election year coming up.

But has it really affected the stock markets?

Are Stock Market Returns Really Linked to Crude Oil Prices?

 

Here's what Girish Shetty wrote about it on one of the recent editions of The 5 Minute WrapUp...

• In the short-term: Yes.
  
  But in the long run, as we can see, Sensex returns have been independent of crude oil prices or even positively co-related!
  
  Crude oil prices doubled from US$ 41 in December 2008 to US$84 in April 2010. In the same time, Sensex also doubled from 8,800 levels to 17,600 levels.
  
  So, please don't fret unnecessarily about crude oil.
  
  Check if your business has a moat that helps it pass on input price increases to its customers. In the long run, they will survive and also gain market share from those that can't pass on prices. Short term pessimism due to rising crude oil prices provides a buying opportunity in these stocks.

As per him, focusing on quality stocks rather than crude oil will matter more in the long run.

In the news from currencies space, as per a leading financial daily, India is considering a proposal to increase import duties on a range of products from plastic to steel as it seeks to curb a ballooning current-account deficit (CAD) and revive the falling rupee.

Note that the rupee has been witnessing selling pressure against the US dollar since the start of this calendar year.

A fall in the rupee has many repercussions for the Indian economy. It means importers buying goods and services at a higher rate that earlier. This doesn't bode well for a developing economy that relies heavily on imports.

Also, India imports most of its oil requirements. So, a fall in rupee leads to a consequent rise in the import bill. The depreciation of the rupee will also add to crude oil's rising cost.

On the corporate side, companies who have taken foreign loans from abroad will be impacted. The repayment obligations in terms of principal and interest will rise, leading to a dent in the cash flows and financials.

Further, companies who import a majority of their raw material requirements will get impacted provided they have not hedged their foreign currency exposure.

Looking at the brighter side, rupee depreciation brings a cheer on the exports front.

A depreciating rupee will provide a much-needed cushion to falling exports. However, a falling rupee will not be the only factor to boost exports. There are certain structural issues too which the government needs to address.

Ankit Shah has explained how the depreciation in rupee is linked to foreign investor outflows and forex reserves in one of his editions of Equitymaster Insider. You can read the entire article here (requires subscription).