Market, rupee fortunes may prove fickle amid Iran flareup

Mumbai: Markets are set to face fresh turmoil on Monday, with Iran closing the Strait of Hormuz because its ports were being blockaded by the US, forcing oil prices back up, in sharp contrast to the optimism on Friday, when the key maritime channel had been opened up.

Stocks and the rupee are seen facing fresh challenges after having recouped losses and strengthened amid easing geopolitical tensions. Last week, the Sensex and Nifty gained up to 1.3%, while broader indices advanced further – the Nifty Midcap 150 rose 3.5% and Smallcap 250 was up 4.4%, extending gains for the second straight week. The rebound faces hurdles if tensions erupt again.

The rupee may open 30-35 paise weaker against the dollar. It closed at 92.93 per dollar on Friday, up 0.30% from the previous close. But traders expect it to slip below 93 due to higher oil prices, after some ships were fired upon as Iran closed the Strait. Satellite imagery late on Sunday showed ships at a standstill, after they had started moving two days before.

“On Friday, things had cooled down a bit after Iran opened the Strait but since then, there have been some volatilities, as a result of which, oil prices have increased,” said Alok Singh, head of treasury at CSB Bank. “It is now turning out to be a market driven by statements from the US and Iran. We should expect volatility to continue till there is clarity.”

Belligerent statements by both sides are balanced by plans for renewed dialogue in Pakistan this week. Mediators and affected Gulf states are also keenly aware that the end of the two-week ceasefire is days away.

RBI may Help Rupee “Based on the current news flow, markets on Monday are likely to react primarily to crude prices,” said Shrikant Chouhan, head of equity research, Kotak Securities. “If oil moves back toward $100 per barrel, the market may open near previous closing levels, and then shift focus toward domestic developments.” When Iran announced on Friday that the Strait of Hormuz would be open as part of peace efforts, Brent crude plunged 9% to $90.38 a barrel, helping Wall Street benchmarks close at record highs later in the day. Before the US-Iran truce, prices were at around $110. All eyes are on the diplomatic peace talks between the US and Iran, with the ceasefire deadline of April 22 fast approaching, said Siddhartha Khemka, head of research at Motilal Oswal Financial Services. “Now that there has been a sharp rally over the past 10 trading sessions, there should be some consolidation,” he said.

Higher oil prices will push the rupee to open lower on Monday before the Reserve Bank of India (RBI) possibly steps in to prevent a sharp fall, traders said. RBI’s move to take dollar demand by oil companies out of the market by providing them a direct supply of the currency through State Bank of India may also prevent a sharp fall in the rupee.

If the war continues for a longer period and crude again goes back to $100-120 per barrel, it will be negative for the economy, and markets could see a worse reaction, said Mahesh Ojha, vice president, research, Kantilal Chhaganlal Securities. “Fourth quarter results from ICICI are marginally better than expected, while HDFC Bank posted a steady quarter, and this could act as a positive trigger on Monday,” he said. “If conditions turn worse, the banking heavyweights could offer support, while if sentiment improves, they could add further upside.”

Since the ceasefire announcement on April 8, the Sensex and Nifty have gained over 5%, while the Nifty Midcap 150 and Nifty Smallcap 250 advanced roughly 10%.

The market seems well-positioned to extend its uptrend, rather than remain range-bound, said Dhupesh Dhameja, derivatives analyst at Samco Securities.