The Nifty 50 index appears to have resumed the slide once more, after reports around the US-Iran ceasefire talks indicate that the negotiations are at the point of collapse. The headlines also feature renewed strikes by the UAE in Iranian territory in what can best be described as renewed escalations in the geopolitical situation.
The Nifty 50 index has slid 1.83% in Tuesday’s trading, as Indian share suffered their worst daily drop in 6 weeks. A total of $115 billion of market capitalization has been wiped off, leaving the Nifty 50 index firmly in the hands of the bears.
The Nifty 50 index’s response to the new escalations is not surprising, as the index continues to trade as an oil and Indian Rupee stress barometer. The Nifty 50 index’s vulnerability to rising oil prices are well documented, and Tuesday’s selloff is a classical example of this vulnerability. Crude oil prices are up this Tuesday and are trading around $108 per barrel. India is a net oil importer and its stock markets typically get swept off in any risk-off repricing events that are driven by inflationary worries as well as concerns around the trade balance the Rupee’s stability. The US CPI data showed a YoY increase from 3.3% to 3.8% (consensus 3.7%), which further compounds the Nifty’s woes.
Nifty 50 Forecast Drivers
Oil shock: The oil shock risk premium is effectively a macro tax on the Indian economy. Higher energy prices raise inflation risk and can unbalance the current account by widening external deficits. The oil shock led to a record outflow of foreign portfolio funds, and these have not fully returned due to high volatility in Indian stock markets.
INR weakness and foreign flows: The Rupee remains vulnerable in a risk-off scenario. As foreign portfolio funds exit, they have to be converted from Rupees to US Dollars, which piles pressure on the Rupee. Imagine what the exit of $12 billion of foreign flows did to the Indian currency. Sustained pressure from oil prices and foreign investor outflows are headwinds to the Nifty 50 index.
Broader Risk-off Sentiment: Pervasive risk-off sentiment across global markets will weigh on the Nifty 50 index, making it hard for the bulls to sustain any rallies.
Price Catalysts for the Week
Brent crude price pathway: This remains the single biggest price catalyst and macro driver for the narrative around the Nifty and the INR. Inflation expectations will impact the Rupee’s stability and the response of the Reserve Bank of India (RBI).
Rupee stability / RBI response: The decline in the INR that follows a rise in oil prices is usually controlled by RBI action. The Rupee operates under a managed float, with the RBI acting to ensure that any declines are orderly and not oversized and disorderly. Usually, the RBI tightens financial conditions when the RBI is under pressure.
Foreign portfolio fund flows and risk sentiment: If there is a condition of broader risk-off sentiment, foreign portfolio funds take flight and the Nifty 50 index gets sold off, even if domestic conditions are supportive. Foreign portfolio funds are not patient; the aim is to preserve value and risk-off market conditions are not value-preserving, hence the capital flight.
Nifty 50 Forecast: Weekly Scenarios
Base case: the base case is for the Nifty 50 index to trade in a volatile environment, with war headlines leading the way. A downside skew is expected as long as oil prices remain elevated and the INR comes under pressure.
Bull case (Nifty higher): If there is a cooling of oil prices, and a de-escalation of the geopolitical situation, the Nifty 50 index will benefit from the situation. The risk premium in this scenario will compress and the index could see a relief rally.
Bear case (Nifty lower): Any escalation in the war headlines will raise oil prices, which is a Nifty 50-negative situation. This is because this scenario is a risk-off setting that leads to foreign portfolio funds exiting the market, and the Rupee coming under renewed pressure that invokes tighter financial conditioning by the RBI.
Nifty 50: Technical Outlook
The double top at 24454 was confirmed by the neckline breakdown at 23842. The immediate downside target at 23271 (21 November 2024 low) is now within reach. If the bulls fail to step in to preserve this support, a further leg lower towards the 27 January 2025 low at 22801 cannot be ruled out.
On the flip side, a defence of the 23271 pivot by the bulls could lead to a relief bounce that aims to target the degraded neckline at 23842. If this price mark is uncapped, a retest of the 24454 resistance could come into the picture. If this level is uncapped, an extension of the bounce towards the 25656 resistance high of 30 June 2025 could be on the cards. Otherwise, rejection at 24454 sets up a potential triple top that would require confirmation via a breakdown of the 23842 neckline.
