As crude prices tumbled below $106 a barrel, hitting a five-month low on Tuesday and easing fears of further damage by Hurricane Gustav to the oil & refinery facilities in the Gulf of Mexico, key Indian equity indices witnessed a short rally, surging nearly 4%.
Easing prices in key metals on the New York Mercantile Exchange led some market participants to believe that a reverse flow of funds from commodities to equities is imminent. An earlier study by FE had mentioned the negative correlation that the Indian stock market had developed with crude oil prices.
The 30-share Sensex of the BSE continued its momentum, in line with the positive opening in European markets, to end the day at 15,049.86 points, posting a gain of 551.35 points, or 3.8%. The wider S&P CNX Nifty of the NSE rose 155.35 points, or 3.57%, at 4,504 points.
Meanwhile, bond yields eased to their lowest in more than two months on Tuesday, as cheaper crude oil calmed inflation concerns, but inched up from the day?s lows as tight cash forced investors to cut positions. The yield on the ten-year benchmark bond ended at 8.61%, off an intra-day trough of 8.52%, its lowest since June 20, according to Reuters data, and a shade below Monday?s close of 8.62%.
Ajay Parmar, head-research, institutional equities, Emkay Shares, said, ?It was clearly the slip in oil prices that gave a boost to investors. However, it is important for crude to slip further, or at least be stable at these levels, to give some relief to the mounting fiscal deficit. This will make Indian markets more attractive to foreign investors.? Added to this was the widely read ?Gloom, Boom & Doom Report? by investment guru Marc Faber. He mentions in his report, ?Oil coming down is a symptom of economic weakness, not a symptom of strength. All I can say is we peaked out in commodity prices.?
FIIs showed some interest in Indian equities on Tuesday. They were net buyers of Rs 1,132 crore, while the Indian mutual funds were net buyers of Rs 209.79 crore. Buying was witnessed across the board on Tuesday, with interest rate-sensitive sectors such as banking and realty leading from the front.
Some market participants believe that inflation has peaked, thus giving less scope for further action by newly appointed RBI governor D Subbarao. Amid improved trading volumes, the BSE?s sectoral indices gained in the 0.5-7% range, with overall market breadth positive and 1,675 stocks rising against 986 declining and 72 remaining unchanged. The falling rupee against the dollar at Rs 44.25 also gave some reason for investors to invest in IT stocks, dealers said.