Volatility in the Indian Stock Market: Reasons and Why not to worry?

The Indian Stock Market in 2020 has been quite volatile with markets swinging from record high levels (Sensex hitting 42,000 mark and Nifty opening at a record high of 12,375.66 on 16th January) to record low levels (with Sensex opening today at 34,463 approx. points and Nifty opening at 10,039 approx. points). While some investors hastily booked losses from their Yes Bank shares for example, some subtly shorted stocks to earn exceptional gains. However, anticipating the market movement has always been a task in 2020 considering the increased sensitivity of India towards the macroeconomic conditions due to a weak microeconomic situation. Before investing / trading in such a volatile market, it is important to understand the cause, the duration and effect of the volatility. A hasty / unthoughtful decision in such a market can lead to huge losses, especially from retail investing point of view.

Let us look deeper into the reasons for this increased volatility in the market.

1. NBFC Crisis – It goes without saying that the entire NBFC contagion or the crisis has hit the economy hard. Affecting the most important sectors of Infrastructure, Real Estate and Automobile, the NBFC crisis managed to create a deadlock in the economy leading to a liquidity squeeze and an eventual slowdown in the economy. The consistent low GDP numbers of the last three quarters (from 5.1% in Q2 to 4.7% in Q3) justifies the severity with which the crisis weakened the entire Indian Economy.
2. US-Iran tensions – With the death of Iranian general Qassim Suleimani in an alleged US drone attack, the conflict between US and Iran escalated drastically affecting most of the oil importing countries including India. Iran was one of the countries India could buy oil cheaper from. However, US imposed sanctions and urged countries to not import oil from Iran leaving India with the option to increase its imports from US Shell companies. These companies sold oil at a higher rate leading to a high forex outflow from India. Strengthening ties with Saudi Arabia and other OPEC members seemed a better option however, a very slow one.
3. Union Budget 2020 – The Union Budget of 2020 did not favour the investors’ expectations leading to huge crash in the market with Sensex falling 988 points and Nifty by 318 points. The Budget did not focus on the economic slowdown and sector-specific requirements for example: relaxation of holding period of Long-term Capital Gains (LTCG) was not announced and the abolition of Dividend Distribution Tax (DDT) did not help boost the confidence of the investors. Investors thus shifted their focus on the FII and FPI inflows and outflows.
4. Coronavirus pandemic – Coronavirus pandemic started in China has taken a toll on the global markets altogether and not just on India. With operations completely shut down for a while in Wuhan, a mssive slowdown in global trade and travel is observed. The already suffering Airline industry comes to a highlight here where not just the Indian but also the International airlines will need aid from the respective authorities and governments. With increasing number of cases in India, investors are skeptical about any gains in the near future.
5. Oil Price War – The recent oil price war between Saudi Arabia and Russia jolted the global markets. US markets tanked 7% while Indian market also crashed to all time lows on Monday. On Friday, Russia refused to cut oil production further amid declining demand due to coronavirus and in the fear of letting the US Shell companies capture more market share. Saudi Arabia reacted to the same by declaring an increase in its oil production and decrease in the oil price. This brought Brent Crude price to $30/barrel levels. In this case, Russia seems to be a clear winner as at $30 levels, US Shell companies cannot sustain production and Saudi Arabia’s deficit will widen at the same time afecting the ambitious projects for economic upliftment (apart from oil). Even though India is on a positive side with this price fall, it seems the US markets crashing pulled Indian markets down along with them.
6. Other microeconomic conditions – The problem with one of the most prominent banks in India, Yes Bank, has pulled the private banking sector into a downfall. With RBI intervening, the picture is not favourable for the bank from a long-term point of view. It also focuses on the fundamental problems faced by banks with high NPAs especially the ones that were associated with NBFCs. Another notable sector is the Telecom sector where AGR compliance is taking a toll on companies like VodafoneIdea and Airtel keeping the two stocks volatile all the time. Airline industry as well has been one of the reasons for volatility with problem of the survival of Air India and Jet Airways, two of the most prominent airlines in the industry, surfacing. The main reasons here are that of the oil price volatility and more importantly the pricing of the tickets (where Air India played the role of a Zombie firm) to survive in the industry.

These are not the only reasons for the volatility, however, their contribution has been tremendous in the last two months and markets have swung largely based on the above reasons.

Talking about the road ahead of this volatility, India seems to be placed at a better position even after this massive slowdown since 2018. Some factors are mentioned below:

1. Favourable oil prices – The oil price war is a definite plus for India. India is the third largest importer of crude oil. A small change in crude oil price has a direct impact on the balance of payment of India and on the GDP eventually simply because the forex outflow reduces. From $60 to $30 level of Brent Crude, India is in a winning position in terms of its forex flows, balance of payment / trade deficit, currency strength and GDP.
2. More breathing space – Lower oil prices will help India focus more on the Banking and NBFC sectors that need much more attention and quicker redressal than what they are getting right now. Smoothening the banking system will have positive trickle down effect on all the other sectors, especially infrastructure, real estate and automobile. These are also the sectors, that investors keen on investing in our sovereign bond would like to perform better making it easier for India to grow at a faster pace.
3. Resuming operations in China – The Chinese economy is now ready to revive from its coronavirus outbreak. Indian companies with operations in China say that the operations have either started or will start by the end of this month bringing some positivity to the company’s numbers. The imports from China, especially in the healthcare sector, may resume any time soon. Trade will ease up across the globe. China will definitely sell its products for cheap but a smooth trade is always to everyone’s advantage.

When we observe the above events and the market movement simultaneously, we realise that sentiments, during volatility, play a major role in creating losses, while sticking to numbers i.e. fundamentals and technical indicators always helps book profits. However, panic spreads and influences faster unfortunately.

Sensex and Nifty have given up almost all the gains today. A sentimental investor would be scared to invest in the market. However, what is interesting here is the fact that a lot of companies show an amazing performance in their books as opposed to their stocks on the indices. This can be a good time to go long on companies whose intrinsic value is higher than the share value for example. However, this requires patience and research. Also, with Q4 results underway, a lot of investors may want to wait and watch. Whatever be the strategy, the conclusion remains that following the numbers and indicators always makes more sense than letting fear and emotions overcome rational decision making. Share prices lower than intrinsic value of the shares on the books is a golden opportunity for long-term investments. On the other hand, increased volatility brings a lot of opportunity for short-sellers. Indian market right now is highly volatile and running at its lowest levels. This can be a great opportuity to go long on a lot of stocks after careful consideration of their fundamentals.