Stock markets globally are on tenterhooks on account of the ongoing geopolitical tensions emanating from Russia’s movement in the Ukraine region and the Indian market is no exception.
Market veteran Motilal Oswal believes that markets tend to “overreact to geopolitical events” but adds that Indian stock market could fall between 5 per cent and 10 per cent depending on the manner the Russia-Ukraine tussle pans out.
However, a situation of a full-scale invasion on Ukraine by Russia is a low probability one, he adds.
“After the Iraqi invasion of Kuwait, for example, the global markets fell but later regained its level within the next six months. If we proxy tensions by looking at Ukrainian EMBI spreads or gold then clearly tensions remain high. In this situation, we think that the key transmission mechanism is not via economic contagion or financial contagion but via commodities,” said the MD & CEO, Motilal Oswal Financial Services.
The brokerage firm is of the opinion that central banks would not change policy unless the rise in commodity prices were to cause a sharp downturn in global growth, he added.
It is quite evident that global markets, including India, have been losing ground based on the developments in the Russia-Ukraine matter. In the last 10 sessions till Tuesday (February 22), the benchmark S&P BSE Sensex has lost ground on seven occasions, shedding over 1,600 points.
Volatility has also been on the rise with the India VIX index – a barometer of near-term volatility – has surged nearly 20 per cent. Incidentally, the Russia matter has only added to the heightened volatility witnessed in the Indian markets as the VIX index is up over 80 per cent in the last six months.
Meanwhile, if there is no major escalation in the matter then Oswal expects “oil price to fall modestly and Indian markets finding support at current levels”. A limited incursion could make the Indian markets fall around 5 per cent while a full-scale invasion could lead to a fall of around 10 per cent from the current levels, he says.
“There is little apparent public support for a full-scale invasion among Russians. It would make little strategic sense, and full-scale sanctions risk significant damage for the Russian economy. The subsequent rise in resources prices risks (approximately) 10 per cent fall in markets from current levels,” he said.