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Bushel, Stock and Barrel

, August 14, 2012, 0 Comments

Nifty boiling point

As chart (Chart 3) shows India’s trade numbers are in precarious state and will worsen as India is short of many resources that are needed for growth. Petroleum, Crude and Products account for 30% of import followed by Capital Goods and then by Gold and Precious Stones. The non-oil trade deficit too is growing strongly since 2005 which adds to woes so unless this component is tempered down the trade deficit will remain stretched.

Inflation can be due to domestic supply demand mismatch or it can be imported, though the current debacle of Indian Rupee can be attributed to rising fiscal deficit. While investors want RBI to ease, the persistent inflation has tied the hands of the central bank. With grim situation in agro commodities the only hope is weak crude price which needs slower growth of Chinese economy.

With this back ground we look how crude price affects Nifty and at what price band of crude does Indian market turns jittery. From the chart (Chart 4) we can see that crude didn’t have much say in Nifty’s performance prior to 2008 as indicated by correlation of less than 20%. But since the crisis the correlation has been on the higher side. As highlighted in the chart the correlation broke as crude breached USD 100 per barrel and even in 2008 as marked in the chart correlation again broke when crude surged past USD 100 per barrel. So it seems the market turns cautious whenever crude moves above USD 100. But as the economy recovers this threshold level will move up but as of now oil at USD 100 makes Nifty boil (sic).