‘Truth has accidentally been called the first casualty of war. Money may, in fact, have priority.’

The ominous words of economist John Kenneth Galbraith rang true as the invasion of Ukraine by Russian forces plunged global equity markets deep into red while crude and gold prices shot up.

Geographically, the zone of conflict is far off India, but in the commercially-connected, close-knit world of finance, the event has cataclysmic potency to hurt the Indian economy and capital markets. The first day of this war marked the initiation of the ‘Gloomy Quadrilateral’ looming over Indian markets. It is a depressing concoction of cues that dampen the zeal of equity investors — Crude Rising, Gold Rising, FIIs Selling, and Rupee Weakening.

Historically, Indian stock market has always plummeted when events combine to form the ‘Gloomy Quadrilateral’.

Since October 2021 there has been consistent selling of Indian equities by foreign institutional investors (FIIs). In the first six weeks of the current calendar year, FIIs have sold equities worth ₹57,774 crore. At the same time, trade deficit of India is ballooning. Now, after the Russian invasion of Ukraine, Indian rupee too started sliding.

At the time of filing the report, rupee had crossed 75.65 per dollar, while Brent crude crossed $105 per barrel and COMEX Gold touched $1,970 per ounce. Nifty index corrected by 815 points, or (-)4.78%.

Equity investors have turned pessimistic as gold and crude account for around one-third of India’s current account deficit and higher prices for both commodities is bad news for the Indian stock market. In the last financial year (2020-21), India’s total import bill was $394 billion, of which 21%, or $83 billion, was contributed by crude alone. In 2018-19, when crude prices spiked up to $88 per barrel, India’s oil import touched $141 billion, which was 27.43% of total imports worth $514 billion.

As per an RBI research paper dated January 04, 2019, a $10 per barrel increase in oil price could raise inflation by roughly 49 basis points and increase the fiscal deficit by 43 basis points (as a percentage of GDP).

Authors of the research report, Saurabh Ghosh and Shekhar Tomar, made these observations based on the presumption that such impact would happen if the government decides to absorb the entire oil price shock rather than passing it to the end consumers. The report also says that for every $10 increase in oil price, oil trade deficit (oil import minus oil export) would go up by $12.5 billion.

Speaking to Fortune India, Vikas Bajaj, head and senior vice president — currency segment, Kotak Securities, compared the current situation with July 2020 and pointed out that the U.S. dollar to Indian rupee exchange rate was at the same level till yesterday.

Just two years back, USD-INR were trading at the same level, but other factors that had a direct bearing on the rupee were trading much lower, like oil was below $50, trade deficit was in single digit and foreign investors were pouring money into our capital markets, says Bajaj. Moreover, global central banks were following easy money policies and the financial system was flush with liquidity, he adds.

“But today, as we see, it is completely reversed, hence we cannot draw comfort on Indian rupee and as facts change, we need to change the view,” Bajaj says. Some market participants believe that higher commodity prices, especially crude and gold, could sink the rupee beyond 80 per dollar.

Apart from crude, higher gold prices are also a potent threat for risk assets like Indian equities. Like oil, India too imports the yellow metal heavily. Since 2014, gold accounted for around 7-8% of India’s overall imports, as per World Gold Council.

In 2021, India’s gold import was just short of 1,000 metric tonnes, and the country ended the year with importing 984 metric tonnes of gold. Last time when India’s import crossed over 1,000 metric tonnes (in 2011), the Nifty index slipped 25% in that year. Any spike in gold import this year will spell trouble for trade deficit numbers and negatively impact rupee and Indian equity markets.

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